What Is a Spendthrift Trust?

Deciding who to leave your estate to is usually not difficult. Deciding how to leave it, however, can be complicated. This is particularly true if you have an intended beneficiary who cannot be trusted to manage her own money. If you find yourself in that position, a spendthrift trust may be the solution. If you are unfamiliar with the concept, the trust attorneys at Parman & Easterday explain a spendthrift trust below.

Trust Basics

At its most basic, a trust is a relationship in which property is held by one party for the benefit of another. The terms of a trust are reduced to writing in a document referred to as a “trust agreement.” Trusts are broadly divided into living trusts and testamentary trusts with the former taking effect during the lifetime of the Settlor (the creator of the trust) and the latter taking effect at the Settlor’s death by the terms of the Settlor’s Will.

How Is a Spendthrift Trust Different from Other Trusts?

Using a trust to distribute an inheritance allows you to retain a certain amount of control over how that inheritance is used. A spendthrift trust is a trust that is specifically aimed at preventing the beneficiary of the trust from squandering his or her inheritance.

Specific language must be used in creating a spendthrift trust.  When drafted properly, a spendthrift clause will prevent a beneficiary from spending trust funds frivolously and prevent the beneficiary from borrowing against the inheritance or encumbering the funds in any way. In other words, a beneficiary could not use the funds in the trust as collateral for a loan or vehicle purchase.  A spendthrift clause can also prevent creditors of the beneficiary from accessing the trust funds to pay the beneficiary’s debts.

Are There Limits to the Protection Offered by a Spendthrift Clause?

While a spendthrift clause can provide both the Settlor and the beneficiary of a trust a great deal of protection against the loss of trust assets, there are limits. Most states do not extend spendthrift protection to debts such a child or spousal support or government debts such as taxes. Some states also limit the value of assets that can be protected by a spendthrift provision in a trust agreement.

State laws govern most aspects of trust agreements, including the validity of a spendthrift clause and the protection offered by the clause. Most states recognize the validity of a spendthrift provision to prevent both voluntary and involuntary transfers of a beneficiary’s interest in the trust. An “involuntary” transfer refers to a creditor attaching a lien to the beneficiary’s interest. In Oklahoma, §60-175.25 of the Oklahoma Statutes governs spendthrift trusts, reading, in pertinent part, as follows:

1. Any instrument creating a trust may provide by specific words that the interest of any beneficiary in the income of the trust shall not be subject to voluntary or involuntary alienation by such beneficiary. Subject to the following provisions of this section, a direction to this effect shall be valid and enforceable.
2. Notwithstanding a provision in the terms of a trust restraining the alienation of the interest of a beneficiary, such interest shall be entitled to be reached in the satisfaction of claims to the following extent:
3. All income due or to accrue in the future to the beneficiary shall be subject to enforceable claims under the laws of this state for:
4. support of a husband, wife, or child of the beneficiary,
5. necessary services rendered or necessary supplies furnished to the beneficiary, or
6. a judgment based on any such claim under subparagraph a or b; and
7. In all cases not mentioned in paragraph 1 of this subsection, all income due or to accrue in the future to the beneficiary in excess of Twenty-five Thousand Dollars ($25,000.00) per calendar year shall be subject to garnishment by creditors of the beneficiary and shall be fully alienable by the beneficiary.

In essence, the statute allows for spendthrift trusts but limits the protection offered by such trusts by allowing debts to be paid that are related to child or spousal support or necessities (food, shelter). The statute further limits the amount protected to $25,000 of income per year.

Contact Parman & Easterday Trust Attorneys

For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding the inclusion of a spendthrift trust in your estate plan, contact the experienced trust attorneys at Parman & Easterday by calling 405-843-6100 to schedule your appointment today.