Spendthrift Provisions (Trusts)

A common question I often get in the final weeks before the bar exam deals with study strategy.  As the exam approaches it becomes much harder to cover everything that might potentially show up on the exam.  I think it's important to be sure not to go into the test having not reviewed a subject hoping that subject won't show up.  But it is also important, especially when time is short, to focus your studying on the subjects that are most likely to be tested.

Trusts has shown up with some real frequency on the MEE.  A spendthrift clause in a trust precludes a beneficiary from voluntarily or involuntarily transferring his/her interest in the trust.  As such, creditors are precluded from reaching the trust to satisfy their claims. Importantly, note that once income has been distributed to the beneficiary, the creditors can then reach that income; it is only the income interest that the creditors cannot reach!

There are some exceptions to note:  A spendthrift clause cannot be used shield the beneficiary from his/her own creditors where the beneficiary is also the settlor.  In other words, a settlor cannot create a trust whereby the settlor is the beneficiary of the trust with a spendthrift clause if the purpose was merely to shield him/herself from creditors  Further, claims for support, alimony, and necessities as well as claims by the government are valid and will withstand a spendthrift provision.  Lastly, any creditor can reach a mandatory distribution of income or principal if the trustee did not make that distribution within a reasonable time.