You may decide to pass on the wealth you’ve spent your life building to your loved ones. However, you may agonize over how to leave family wealth to a loved one when you worry about how they might use – or misuse – that money. Fortunately, a spendthrift trust can provide you with an estate planning tool to protect the inheritance or wealth that you leave to a loved one. Spendthrift trusts protect family wealth and shield heirs from poor personal or financial decisions.
What Is a Spendthrift Trust?
A spendthrift trust refers to a trust in which the trust documents include provisions that expressly restrict a beneficiary’s ability to sell, assign, or otherwise pledge their interest in the trust. Spendthrift trusts may also give trustees discretion over the timing and amount of distributions to beneficiaries. Spendthrift trust provisions typically shield trust assets from most creditor claims. Most types of trusts can become spendthrift trusts, as the “spendthrift” nature refers to specific provisions intended to shield the trust from claims by beneficiaries’ creditors.
How Spendthrift Trusts Protect Beneficiaries
Families may create spendthrift trusts to protect beneficiaries from various financial issues, such as:
- Substantial personal debts and creditor claims
- Judgment liens (e.g., personal injury or malpractice judgments or settlements)
- Bankruptcy
- Divorce claims
- A beneficiary’s impulsive spending habits or poor financial discipline
- A beneficiary’s addiction issues, including substance abuse or gambling addictions
A spendthrift trust can protect a beneficiary from these issues by preventing them from forcing the trust to make a large distribution or using future distributions as collateral for loans or other borrowing. As a result, a family may use a spendthrift trust to shield a loved one’s inheritance from creditor claims or prevent them from squandering their inheritance through reckless decision-making.
The Limits of Spendthrift Protection Under Texas Law
In Texas, spendthrift provisions in a trust document cannot protect a beneficiary’s interest from all financial issues. For example, a Texas court may allow child or spousal support claims against a beneficiary to pierce spendthrift protections in a trust document, ordering a trustee to distribute funds to satisfy the beneficiary’s support obligations. Texas also prohibits self-settled spendthrift trusts, as a third party must create the spendthrift trust on the beneficiary’s behalf. Furthermore, a beneficiary cannot serve as the sole trustee with unlimited discretion over distributions. Spendthrift trusts require independent trustees (or at the very least, co-trustees), with distributions intended to cover a beneficiary’s living expenses, education, or medical care.
Finally, spendthrift protections end once a trust distributes funds to a beneficiary. At that point, those funds become the beneficiary’s property subject to collection by creditors or to the beneficiary’s discretion in how to spend the money.
Should You Create a Spendthrift Trust for Your Loved Ones?
Situations in which you might consider establishing a spendthrift trust to protect an inheritance or family wealth for a loved one include:
- An heir with substantial debts or a significant likelihood of incurring debt
- Heirs with poor money management skills
- An heir in a high-conflict divorce
- Heirs with specific vulnerabilities to undue influence, including due to addictions or substance abuse
Contact Our Estate Planning Attorneys Today to Discuss Your Options
If you worry about leaving money to a loved one, a spendthrift trust can provide a powerful tool that may provide you with peace of mind. Contact Guest & Gray today for a free consultation with a trusts lawyer to learn more about spendthrift trusts, their benefits, and their limitations under Texas law, and to discuss whether you can use a spendthrift trust to address your specific estate planning concerns and goals.
