What Is a Spendthrift Clause in a Trust?

A spendthrift, of course, is a person who spends without regard to thrift. (When the word was coined, one meaning of “thrift” was “wealth,” so a spendthrift was originally one who spent his wealth.) Ordinarily, the interest held by a beneficiary in a trust is something a spendthrift can spend—an asset of the beneficiary, having some monetary value. The beneficiary can alienate (i.e., transfer ownership to another person or entity) that interest, for example by assignment. And a creditor of the beneficiary can ordinarily attach the beneficiary’s interest in the trust to the extent of the debt, and receive some portion of distributions from the trust to which the beneficiary is entitled, until the debt is satisfied.

A spendthrift clause is simply a provision in a trust intended to thwart these operations. It prevents the beneficiary from alienating his or her interest in the trust, whether voluntarily or involuntarily (thereby prohibiting creditors from attaching the interest).

State Law Enforceability of Spendthrift Clauses

But in order for spendthrift clauses to be effective, they must be enforceable under applicable state law. Virtually every state recognizes spendthrift clauses as valid in some form. About half the states have a statute legitimizing spendthrift trusts; the others have recognized them by judicial decision.

The effect of spendthrift clauses may be eroding to different degrees in the various states, but the spendthrift trust remains a powerful planning tool. In view of the complications, as spendthrift law continues to develop, individuals are strongly urged to work with an attorney experienced in their state’s law in this matter.