What exactly is a spendthrift clause?
A spendthrift clause is a clause in a will or a trust that restrains the transfer of income. It can be used in a will via a provision or it can be used in a trust (making it a spendthrift trust).
In Arizona, a trust can be a spendthrift trust if it restrains the beneficiary’s ability to transfer his or her interest in income or principal voluntarily or involuntarily. A.R.S. §§ 44-7701(A), 44-7702. Further, a spendthrift provision in a will is valid only if it restrains either voluntary or involuntary transfer of a beneficiary’s interest. A.R.S. § 14-10502. Once a will has a spendthrift clause the beneficiary may not transfer his or her interest in the trust, and thus a creditor or assignee of the beneficiary cannot attach, garnish, execute, or otherwise reach the interest or a distribution by the trustee before the beneficiary receives it. A.R.S. § 14-10502(C). What this means is if a creditor or assignee knows that you have some money or assets in a trust or you are expecting money or assets as inheritance from a will, the creditor or assignee cannot just reach into the trust or the will and take the money to satisfy your debt or promises to that assignee. They will have to wait until the money actually gets to you in order to reach the money. A spendthrift clause is almost like a shield where the testator of a will or settlor of a trust does not believe the beneficiary should have control over the assets before they reach the beneficiary.
However, whether or not a trust has a spendthrift provision, a creditor may be able to reach the property in a revocable trust if the trust is subject to claims of the settlor’s creditors. A.R.S. § 14-10505(A)(1). This is the problem with a self-settled trust. A self-settled trust is one where the settlor/grantor is also the primary beneficiary.1 Basically, a spendthrift clause may prevent a creditor from reaching the interest or distribution of a beneficiary, but a creditor may have interest in the settlor’s property up to the amount of the settlor’s interest in the portion of the trust attributable to that settlor’s contribution. A.R.S. § 14-10505(A).
Can I get rid of a spendthrift clause?
A testator can amend his or her will any time, and you should be able to amend your trust. However, a beneficiary will not be able to get rid of a spendthrift clause. A spendthrift clause (or a spendthrift trust), when properly executed, is usually pretty steadfast. However, like anything there are exceptions to the rule. Spendthrift provisions do not work against:
- The United States. A spendthrift provision is not enforceable against a claim by the U.S. only to the extent a statute of the state or the federal government so provides. A.R.S. § 14-10503(C).
- Child Support Obligations. A trust that has a spendthrift provision does not work against a beneficiary’s child who has a judgment or court order against the beneficiary for support or maintenance. A.R.S. § 14-10503(A).
- Judgment Creditors. If the judgment creditor provided services relating to protecting the beneficiary’s interest in the trust, the judgment creditor can get a court order attaching present or future distributions to or for the benefit of the beneficiary. A.R.S. § 14-10503(A).
- Mandatory Trusts. A trust should be discretionary in order for a spendthrift clause to have legal effect.2
If you have a question regarding spendthrift clauses contact an experienced estate planning attorney at Ariano & Reppucci.
These exceptions do not apply to special needs trusts. A.R.S. § 14-10503(B). A special needs trust is set up for a loved one with a disability where the trustee cannot give money directly to the beneficiary so the beneficiary does not lose the ability to receive Supplemental Security Income (SSI) or Medicaid benefits.3
1 David Walters, Using A Self-Settled Trust To Protect Assets, PALISADESHUDSON.COM, http://www.palisadeshudson.com/2013/06/using-a-self-settled-trust-to-protect-assets/ (last visited Feb. 4, 2015).
2 William C. Spaulding, Trusts and the Rights of Beneficiary Creditors, THISMATTER.COM, http://thismatter.com/money/wills-estates-trusts/trusts-beneficiary-creditors.htm (last visited Feb. 4, 2015).
3 Stephen Elias, Special Needs Trusts –The Basics, NOLO.COM, http://www.nolo.com/legal-encyclopedia/special-needs-trusts-30315.html (last visited Feb. 4, 2015).