In this article, we’ll answer the questions, “What is a Spendthrift trust?”. “Where does it fit into estate planning?”, and “Can creditors access funds in a spendthrift trust?”

Depending on the financial and familial needs of a client, there a number of options available in the estate planning process. One such tool is a spendthrift trust. A spendthrift trust can be considered a type of living trust. There is the grantor (the person who opened the trust and who “owns” the assets listed in the trust), the beneficiary (the person(s) who receive the assets base on the language of the trust) and the trustee (the person or entity who makes decisions regarding the trust, based on the direction of the grantor). Ultimately, a spendthrift trust is a useful tool when the grantor wants to limit access of the assets to the beneficiary, avoid probate for the assets listed in the trust, and protect certain assets from creditors.

Where does the spendthrift trust fit into estate planning?

As mentioned above, a spendthrift trust is a great tool when the grantor wants to have his or her assets avoid probate, but does not want the beneficiary to receive those assets in one lump sum upon the death of the grantor. The trustee is given a variable degree of responsibility for the assets in the trust for how and when those assets will be given to the beneficiary. In some situations, the trustee may have complete control over the assets and will be the one deciding if the beneficiary receives any assets at all. In other cases, the trustee may just be an entity that is tasked with dispersing a set amount of funds to the beneficiary with a set frequency over a predetermined period of time. The trust can even be made so that the trustee has to determine the beneficiary’s income needs and dispense only the amount needed for living expenses.

Can Creditors File a Claim Against a Spendthrift Trust?

The rights available to creditors vary from state to state, but as far as Illinois and Iowa are concerned creditors have little right to the trust assets for the beneficiary of a spendthrift trust. As in most states, the grantor of a spendthrift trust cannot simply name himself the trustee and beneficiary of a trust and expect his money to be protected from creditors. However, depending on the structure of the trust, money that is purely meant for the “survival” of a beneficiary may be safe within a spendthrift trust, even if the grantor is still alive. It is best to speak with a qualified professional regarding the nuances of different trust provisions. In most states the assets of a spendthrift can be reached by creditors only in the following situations:

  • Federal tax liens
  • Alimony and child support obligations
  • Judgment creditors who have provided services to protect the beneficiary’s interest in the trust and those who have a court order
  • If the trust income is much greater than what is determined to cover the beneficiaries basic needs and living expenses a creditor may be able to file a claim

As with any trust, it is important to discuss the specifics of your financial and familial needs with a qualified professional to determine which estate planning tool is the best fit. Spendthrift trusts can be a great tool when discretion is necessary for an individual’s assets. if you are considering a spendthrift trust and have questions, don’t hesitate to reach out to our legal professionals at 630-324-6666 and check out our other articles at Learn About Law.