What Is a Spendthrift Clause and How Can It Protect a Trust?

A spendthrift clause is a special trust provision that protects trust assets from a beneficiary’s creditors. It also prevents a beneficiary from using trust assets as collateral for a loan. When a trust has a valid spendthrift clause, a creditor of a beneficiary cannot collect against the trust assets held for them.

For a spendthrift provision to work, it must prevent both voluntary and involuntary transfers of a beneficiary’s trust share to creditors.

How a Spendthrift Clause Works

A spendthrift clause will only work if the beneficiary’s trust share is held in trust upon the trustmaker’s death. If the trust agreement states that the trust assets are distributed to the beneficiary upon the trustmaker’s death, then the trust assets will not be protected from the beneficiary’s creditors.

Once the assets are distributed to the beneficiary, the trust terms do not matter: it’s in the beneficiary’s hands.

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Common Uses of Spendthrift Clauses

A spendthrift clause is primarily used to protect assets from the beneficiary’s creditors. Most living trusts have spendthrift clauses.

When a person sets up a trust, they often have no way of knowing ahead of time whether their chosen beneficiaries (often their children) will have a creditor once the trustmaker dies. By including a spendthrift clause in your trust, you can ensure that trust assets will not go to your beneficiary’s creditors.

If a beneficiary has a creditor when the trustmaker dies, the trustee can still use the trust assets for the beneficiary, including paying expenses on the beneficiary’s behalf, making distributions to the beneficiary, and making purchases for the beneficiary’s benefit.

Another common use of a spendthrift clause in Florida is when the trustmaker is concerned about the beneficiary’s own behavior. For example, if the beneficiary has exhibited destructive behaviors, such as gambling, substance abuse, risky investments, or multiple divorces, then a spendthrift clause can protect the assets from the beneficiary’s own actions.

Exceptions to Enforceability of Spendthrift Provisions in Florida

A spendthrift clause does not work for all types of debts. Here are the exceptions in Florida:

• Court-ordered support, such as child support or spousal support
• A creditor who has provided services for the protection of the trust share at issue.
• A claim made by the state of Florida or the United States if there is a law that grants an exception.

Does a Spendthrift Clause Work in a Self-Settled Trust?

In Florida, a spendthrift clause does not work in a self-settled trust. Spendthrift provisions cannot protect the trustmaker’s assets from the trustmaker’s own creditors. Florida law and courts have ruled that allowing spendthrift provisions to protect assets from a trustmaker’s own creditors would be against public policy.

About the Author

Gideon Alper is an attorney who specializes in asset protection planning. He graduated with honors from Emory University Law School and has been practicing law for almost 15 years.

Gideon and the Alper Law firm have advised thousands of clients about how to protect their assets from creditors.