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Trusts • Transfer of Interests
TRUSTS#018
Legal Definition
A self-settled spendthrift trust is when the person who creates the trust is also the sole beneficiary, with no other beneficiaries involved. In most jurisdictions, while these trusts are valid, the spendthrift provisions (which typically prevent creditors from accessing the trust assets) are not recognized. This means that creditors can reach the trust assets, allowing for alienation, even though a few jurisdictions do uphold these spendthrift protections.
Plain English Explanation
A spendthrift trust isolates money and assets from the risks and liabilities of its beneficiary. In other words, it protects money from the bad life choices made by the person benefiting from the money. However, when a beneficiary sets up a spendthrift trust for themselves, it is considered "self-settled," and is seen more like a sneaky way to try to avoid liability. In other words, the law allows other people to protect assets for you through a spendthrift trust, but it's not as willing to let you try to protect your own assets this way.
That being said, the law won't invalidate the trust. It'll still recognize it as a valid trust, but it will ignore the parts of the trust that protect against creditors.
That being said, the law won't invalidate the trust. It'll still recognize it as a valid trust, but it will ignore the parts of the trust that protect against creditors.
Hypothetical
Hypo 1: Bob is a successful doctor but has a gambling problem. He puts $5 million in a spendthrift trust that names himself as the sole beneficiary. Bob continues gambling and racks up $500k in gambling debts. His creditors want to collect from the trust, but Bob points out the trust has a spendthrift provision. Result: The creditors can reach the trust assets despite the spendthrift language. Since Bob settled this trust for his own benefit, the spendthrift provision is unenforceable.
Hypo 2: Sam wins $10 million in the lottery. To protect the money, he puts it in a spendthrift trust that benefits his daughter Sally. Sally has a drug problem and soon owes creditors $50k. The creditors try to collect against the trust, but the trustee refuses to pay, citing the trust's spendthrift provision. Result: Here the spendthrift provision is valid because Sam settled this trust for Sally's benefit, not his own. The creditors cannot reach the trust assets.
Hypo 2: Sam wins $10 million in the lottery. To protect the money, he puts it in a spendthrift trust that benefits his daughter Sally. Sally has a drug problem and soon owes creditors $50k. The creditors try to collect against the trust, but the trustee refuses to pay, citing the trust's spendthrift provision. Result: Here the spendthrift provision is valid because Sam settled this trust for Sally's benefit, not his own. The creditors cannot reach the trust assets.
Related Concepts
Are discretionary trusts involuntarily alienable?
Are discretionary trusts voluntarily alienable?
Are spendthrift trusts involuntarily alienable?
Are spendthrift trusts voluntarily alienable?
Are support trusts involuntarily alienable?
Are support trusts voluntarily alienable?
What is a discretionary trust?
What is a spendthrift trust?
What is a support trust
