Debts of Trust Beneficiaries in the U.S. and Spendthrift Trusts
This article provides an overview of trust laws in the United States applicable to debts owed by trust beneficiaries. It also contains form language for adding a spendthrift trust provision to an estate planning trust.One of the most common reasons parents and grandparents go through the process of making an estate planning trust is to provide financial security for their children, grandchildren, and other heirs. However, this is not always a straightforward process of simply leaving an inheritance to selected beneficiaries. If the individuals you want to benefit from the trust have been irresponsible with money or are unlikely to make wise decisions about how to manage inherited wealth, you may want to take additional steps to restrict how funds you set aside for them may be used. One of these steps may be making sure bill collectors cannot access any interest your child or grandchild may have in your trust. An estate planning lawyer may use a spendthrift trust, along with other estate planning strategies, to protect beneficiaries from debts they owe or assignments they attempt to make. But there are limitations on the extent to which a trust can insulate a beneficiary from his or her debts.
The rights of creditors and assignees to attach a beneficiary's interest in a trust vary from state to state. The laws regarding whether a spendthrift trust provision is enforceable are not the same in all states. Each state sets forth its own laws regarding exceptions that may apply to the ability to reach a beneficiary's interest in a trust. The issue of how to ensure trust funds will be used for the benefit of your beneficiaries is very complex, due to differences in state laws, the rules applicable to different types of debts and liabilities, the different types of interests a beneficiary may have in a trust, etc. Accordingly, whether you are a trustee faced with a claim against a beneficiary's interest, a debt collector trying to collect a debt owed by a beneficiary or a beneficiary concerned about what you will inherit from a trust, you need to consult an attorney familiar with the state laws that apply to your unique circumstances. An estate planning lawyer can help determine which jurisdiction has laws most favorable to establishing a trust based on specific concerns, including potential creditor claims.In terms of protection of a trust interest from creditor claims, there is a substantial distinction in the law between estate planning trusts that contain a spendthrift trust provision to protect the interests of a beneficiary and asset protection trusts established with the intent of protecting assets of the settlor or grantor from creditor claims. The focus of this article is estate planning trusts, not asset protection trusts or self-settled spendthrift trusts.To find statutes for a particular state on creditor claims against a beneficiary's interest and what is required to draft a valid spendthrift trust provision, refer to our list of state trust laws below. You can also view a sample spendthrift trust clause below that is similar to the language used in many
estate planning trusts.
Language for Spendthrift Provision in Estate Planning Trust
The following is an example of form language that is often used to add a spendthrift provision to a living trust or similar type of estate planning trust:
Article 1. Spendthrift Trust:
A. No Assignment. The interest of any beneficiary in the principal or income of this Trust shall not be subject to the beneficiary's liabilities, claims of such beneficiary's creditors, and shall not be liable to attachment, assignment, anticipation, execution or any other process of law. Furthermore, no beneficiary of this Trust shall have any right to pledge, encumber, hypothecate or alienate such beneficiary's interest in this Trust in any manner, except as provided in this Trust. A Trustee of this Trust may deposit in any bank account or other account designated in writing by a beneficiary, income or principal payable to such beneficiary.
B. Protection from Creditors.
If the Trustee determines that a beneficiary of this Trust would not benefit as greatly from an outright distribution from the trust because such distribution may be subject to creditor claims, attachment, assignment or similar legal process, the Trustee shall instead expend those amounts on behalf of or for the benefit of such beneficiary.
As with all trust provisions, a
spendthrift trust clause must be drafted in accordance with applicable federal and state laws to ensure it will be enforced in the manner intended by the settlor or grantor of the trust. Only a licensed attorney can advise on how to draft a trust document that will protect a beneficiary's interests from claims to collect debts or liabilities owed by such beneficiary. For more on trusts used when the settlor or grantor has concerns about a beneficiary's ability to manage an inheritance, see
The Uniform Trust Code on Debts of Trust Beneficiaries
Because more than half of all states have enacted the Uniform Trust Code or UTC, it is helpful to look at the UTC when reviewing U.S. law on debts owed by trust beneficiaries. See Trust Law Sources. The Uniform Trust Code addresses these issues in Article 5, Creditor's Claims; Spendthrift and Discretionary Trusts.If the trust at issue does not contain a spendthrift provision or the spendthrift provision in the trust document does not apply to the beneficiary's interest, then pursuant to Section 501 of the Uniform Trust Code, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary's interest by attaching present or future distributions to or for the benefit of such beneficiary or other means. Section 501 also provides the court may limit the award to relief that is appropriate under the circumstances.Section 502b of the UTC prevents a beneficiary's creditor from attaching a beneficiary's interest in the trust if the trust instrument contains a spendthrift trust provision that meets certain requirements. Pursuant to Section 502a of the Uniform Trust Code, a spendthrift provision must restrain both voluntary and involuntary transfer of a beneficiary's interest to be valid. Therefore, to prevent the beneficiary's interest in a trust from being reached by creditors of the beneficiary under the UTC, a spendthrift provision must prohibit the beneficiary from assigning or otherwise transferring the beneficiary's interest in the trust.Nevertheless, there are some exceptions that allow a creditor to attach a beneficiary's interest in a trust even when the trust contains a valid spendthrift clause. Exceptions to a spendthrift trust are set forth in Section 503 of the Uniform Trust Code. For example, the laws of some states allow a beneficiary's trust interest to be reached for the payment of claims for spousal support, child support, tort judgments, etc. in some circumstances. Depending on state law, an Exception Creditor may be able to reach trust assets if it meets certain criteria. Under the UTC, if the trust contains a valid spendthrift provision, creditors that are not Exception Creditors are prevented from reaching a beneficiary's interest until the beneficiary receives a distribution from the trust. Another factor that is relevant in determining whether a creditor can reach a beneficiary's trust interest is whether a distribution is subject to the discretion of the trustee.Although states that have enacted the Uniform Trust Code may have similar statutory frameworks, substantial differences still exist in the laws applicable to spendthrift trusts, discretionary trusts, and creditor claims in these states.
Copyright 2020 Pennyborn.com. ALL RIGHTS RESERVED. Published August 10, 2017. Updated September 7, 2017.
State Laws on Debts of Trust Beneficiaries
To find laws governing the rights of creditors to collect on debts owed by trust beneficiaries, and the requirements for a valid spendthrift trust, refer to the list of state statutes below and our list of state
trust laws.Alabama: Sections 19-3B-501 through 508 of the Code of Alabama.Alaska: Alaska Stat. Ann. Sec. 34.40.110 and other parts of the Alaska Revised Statutes.Arizona: Arizona Revised Statutes Section 14-10501 through 14-10507.Arkansas: Arkansas Code Sections 28-73-501 through 28-73-507.California: California Probate Code Sections 15300-15309, 18000-18201, 19000-19403, and other parts of 15000-19403.Colorado: Colorado Revised Statutes.Connecticut: Connecticut General Statutes.Delaware: 12 Del. C 3536, 12 Del. C 3570-3576, and other parts of Title 12 of the Delaware Code.Florida: Chapter 736 of the Florida Trust Code. See Sections 736.0501 through 736.0507 of the Florida Statutes.Georgia: Sections 53-12-80 through 53-12-83 of the Georgia Code.Hawaii: HRS Sections 554G-1 through 554G-11 and other parts of the Hawaii Revised Statutes.Idaho: 15-7-502, 68-201, and other parts of the Idaho Statutes.Illinois: Illinois Compiled Statutes.Indiana: IC 30-4-4-3; IC 30-4-3-2; and other parts of Title 30, Article 4 of the Indiana Trust Code.Iowa: Iowa Trust Code Sections 633A.2301 through 633A.2307 and other parts of Iowa Code Title XV, Subtitle 4, Chapter 633A.Kansas: Article 5 of the Kansas Uniform Trust Code: Sections 58a-501 through 58a-507 of the Kansas Statutes.Kentucky: Kentucky Uniform Trust Code, Sections 386B.5-010 through 386B.5-060 of the Kentucky Revised Statutes.Louisiana: Louisiana
RS 9:2001 through RS 9:2007.Maine: Title 18-B, Sections 501 through 507, of the Maine Revised Statutes.Maryland: Title 14.5 of the Maryland Trust Act, Sections 501 through 511.Massachusetts: Chapter 203E, Article 5, of the Massachusetts Uniform Trust Code.Michigan: 700.7501 through 700.7508 of the Michigan Compiled Laws.Minnesota: 501C.0502 through 501C.0507 of the Minnesota Statutes.Mississippi: Title 91, Trusts and Estates, of Mississippi Code.Missouri: 456.5-501 through 456.5-508 of the Revised Statutes of Missouri.Montana: 72-38-501 through 72-38-507 of the Montana Code Annotated.Nebraska: 30-3846 through 30-3852 of the Nebraska Revised Statutes.Nevada: NRS 166.010 Spendthrift Trust Act of Nevada and Title 13, Chapter 163, Trusts, of Nevada Revised Statutes.New Hampshire: 564-B:5-501 through 564-B:5-510 of the New Hampshire Revised Statutes Annotated.New Jersey: 3B:31-35 through 3B: 31-41 of the New Jersey Statutes.New Mexico: Chapter 46A, Article 5 of the New Mexico Statutes.
New York: 7-3.1 through 7-3.5, 10-7.1 through 10-7.4, and other parts of New York Estates, Powers and Trusts Law or EPTL.North Carolina: G.S. 36C-5-501 through G.S. 36C-5-508.North Dakota: 59-13-01 through 59-13-07 of North Dakota Century Code.Ohio: 5805.01 through 5805.07 of the Ohio Revised Code.Oklahoma: 60 O.S. Sections 175.81 through 175.92, 60 O.S. 175.1 through 175.57, and Title 31 of the Oklahoma Statutes.Oregon: 130.300 through 130.325 of the Oregon Revised Statutes.Pennsylvania: 20 Pa. C.S.A. Sec. 7741 through 7748.Rhode Island: The State of Rhode Island General Laws Sections 18-9.1-1, 18-9.2-1, and other parts of Title 18, Fiduciaries.
South Carolina: Section 62-7-501 through 62-7-507 of the South Carolina Code.South Dakota: Title 55 of the South Dakota Codified Laws, including Chapter 55-1 and Chapter 55-16.Tennessee: 35-15-501 through 35-15-510 of the Tennessee Code.Texas: Section 112.035 Spendthrift Trusts of the Texas Trust Code.Utah: 75-7-501 through 75-7-519 of the Utah Code.Vermont: 14 V.S.A. Sections 501 through 507.Virginia: Sections 64.2-742 through 64.2-749 of the Code of Virginia.Washington: Title 11 RCW, Probate and Trust Law, RCW 6.32.250, and other parts of the Revised Code of Washington.West Virginia: Section 44D-5-501 through 44D-5-507.
Wisconsin: 701.0501 through 701.0508 of the Wisconsin Statutes.Wyoming: 4-10-501 through 4-10-523 of the Wyoming Statutes.Note: State laws are revised, added, and repealed frequently. The above list of state statutes is for educational purposes only and does not constitute legal advice. For information on the current status of laws and regulations applicable to a particular estate planning trust and the interests of a beneficiary thereof, consult a licensed attorney. Finding an Attorney.
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