Also known as: spendthrift restriction · spendthrift clause · spendthrift provision
Written by attorneys — see sources below.
A term of a trust which restrains both voluntary and involuntary transfer of a beneficiary's interest. The restraint prevents the beneficiary from assigning the interest and shields the interest from creditors until the trustee delivers a distribution to the beneficiary.
Sylvia Santos creates an irrevocable trust for her nephew Scott Summers and includes a clause stating that Scott's interest shall not be anticipated, assigned, or reached by creditors. Scott later attempts to pledge future distributions as collateral for a loan. The clause satisfies the definition of a spendthrift provision because it restrains both voluntary and involuntary transfers.
Sasha Stone creates a trust for her daughter Selena Singh that contains no spendthrift language. Selena's judgment creditor obtains a court order attaching future distributions. The court authorizes the attachment because the absence of a spendthrift provision allows the creditor to reach the beneficiary's interest.
Sydney Santos funds a trust for her brother Sofia Stern and states that Sofia's interest is held subject to a spendthrift trust and may not be reached by creditors. Sofia attempts to assign part of her interest to settle a debt. The language satisfies the validity requirement because it restrains both voluntary and involuntary transfers.
Scott Summers creates a discretionary trust for his niece Sylvia Santos that includes a spendthrift provision. Sylvia's tort creditor obtains a judgment and seeks a court order compelling the trustee to distribute funds to satisfy the judgment. The creditor cannot compel distribution even though the trust contains a spendthrift provision.
Sasha Stone transfers assets into a revocable trust for her own benefit and includes spendthrift language. After a judgment is entered against her, the creditor seeks to reach the trust assets during her lifetime. The assets remain reachable because the settlor's retained power of revocation prevents the spendthrift restriction from shielding the property from her own creditors.
Isaac Boggs began working for South Central Bell in 1949 and remained employed until his retirement in 1985. He was married to Dorothy Boggs from 1949 until her death in 1979, and the couple had three sons. After Dorothy died, Isaac married Sandra Boggs in 1980, and they remained married until Isaac's death in 1989. Upon retirement, Isaac received a lump-sum distribution of $151,628.94 from the Bell System Savings Plan, which he rolled over into an Individual Retirement Account worth $180,778.05 at his death. He also received 96 shares of AT&T stock from the Bell South Employee Stock Ownership Plan and a monthly annuity of $1,777.67 from the Bell South Service Retirement Program. Dorothy's will bequeathed one-third of her estate to Isaac outright along with a lifetime usufruct in the remaining two-thirds, with naked ownership passing to the sons. A 1980 Louisiana judgment of possession ascribed to Dorothy's estate a community property interest in Isaac's Savings Plan account valued at $21,194.29. After Isaac's death, Sandra began receiving a survivor annuity and other benefits. The sons filed suit in Louisiana state court claiming a portion of the retirement benefits under Dorothy's will and Louisiana community property law. Sandra then filed a declaratory judgment action in the United States District Court for the Eastern District of Louisiana asserting that ERISA preempts the sons' claims. The District Court granted summary judgment against Sandra. The Fifth Circuit affirmed. The Supreme Court granted certiorari.
A term stating that the beneficiary's interest shall not be anticipated, assigned, or reached by creditors restrains both voluntary and involuntary transfers. Words of similar import, such as holding the interest subject to a spendthrift trust, also suffice. The provision is valid only when both types of transfers are restrained.
Supporting sources
A valid spendthrift provision prevents a creditor from reaching the interest or any distribution before the trustee delivers it to the beneficiary. Once the beneficiary actually receives a distribution, ordinary creditor remedies apply to those funds. The timing of the trust's creation relative to the debt does not affect this protection when the provision is valid.
Supporting sources
An exception allows a court to order distributions to satisfy a support judgment for a child, spouse, or former spouse even when a spendthrift provision exists. The court may direct the trustee to pay an equitable amount not exceeding what the trustee would have distributed under the distribution standard. General creditors receive no such exception.
Supporting sources
The assignment is ineffective because a beneficiary may not transfer an interest in violation of a valid spendthrift provision. The trustee may disregard the assignment and continue to administer the trust according to its terms. The attempted pledge or assignment does not create rights in the assignee.
Supporting sources