What Is a Spendthrift Provision in a Trust?
Updated: Oct 9
A spendthrift provision is a limiting clause in a trust that helps prevent the beneficiary of the trust money from overspending the assets received from that trust. Anyone who is able to inherit or be given money or assets from a trust or estate will receive those assets without limitations as to how the money will be spent. A spendthrift provision in a trust puts a limit on how the distribution of the trust will be given to the beneficiary, to stop that person from “shopping ‘til they drop,” or “going to town” on the trust assets. It is a way to help the person not waste the trust assets and resources with frivolous spending, and to help the distributed funds to be used wisely, if possible.
Protection from Creditors
A spendthrift provision can protect trust assets from creditors of the beneficiary. This means that a creditor cannot in most cases get access to the trust funds to force the individual who has received the trust to use it to pay his or her outstanding debts. The spendthrift provision is a way for the grantor of the trust to put limitations on the distribution of the trust funds.
Protection from Judicial Foreclosure or Attachment
In Maryland, a spendthrift provision will prevent the judicial foreclosure or attachment of that distribution from a creditor of the beneficiary. It also means that in Maryland, the beneficiary is not able to transfer any interest that would violate the spendthrift provision.
Who Is Required to Abide by a Spendthrift Provision?
Maryland laws state that any current or future trust distributions to beneficiaries subject to a spendthrift provision can apply to:
Children or spouses the beneficiary must support
Creditor judgments against the beneficiary (services protecting the beneficiary trust interests)
Statutory claims by the State of Maryland or the United States (such as from the IRS, etc.)
Who Controls the Spendthrift Trust?
In Maryland, the beneficiary is permitted to be the Trustee of the trust in many cases, when there is a spendthrift provision. This allowance might help the beneficiary to keep the assets in the trust and away from creditors of the beneficiary.
Why Would You Want to Make a Spendthrift Provision in a Trust?
If you have a trust and are unsure if the beneficiary would “overspend” the money in the trust (as in a person with little self-control who had sudden access to money), a spendthrift provision can put limitations on that spending power of the beneficiary to help preserve the assets and resources of the trust longer.
Benefits of a Spendthrift Trust?
If a beneficiary stands to inherit a trust in a large lump sum, and the grantor has concerns that the beneficiary would spend it all at one time frivolously, a spendthrift trust provision will put the brakes on overspending, and help preserve the trust assets for the long term.
For example, a trust that leaves $4 million to a relative could allow the trustee to decide that the beneficiary has to live off of the interest paid in the trust each year first, cannot use the trust principal for collateral for a new speculative business, and that the beneficiary receives the lump sum only after the beneficiary reaches a certain responsible age.
Get in Touch With A Maryland Estate Planning Lawyer Today
Any time that a trust will be distributed currently or in the future with you as the grantor, you are going to have questions as to how the spendthrift provision will work. If you have questions regarding spendthrift trust provisions and want to know the best way to preserve trust assets and resources for the beneficiaries of the trust, schedule a consultation with our office, and let's talk.