What Is a Spendthrift Clause in a Trust?

Money burning a hole in one's pocket

In estate planning, a concern can arise about protecting assets from being recklessly squandered away by a beneficiary. The concern may exist simply because there are some people who handle money irresponsibly.

There may also be concern when a beneficiary:

  • Has a history of substance abuse or addictive behavior
  • Is in a destructive or problematic relationship
  • Is heavily prone to reckless gambling
  • Has a large amount of debt and is under scrutiny of creditors

Often the answer is to include a spendthrift clause or provision in a trust as part of the estate plan.

What is Spendthrift Clause?

A spendthrift provision in a trust limits both voluntary and involuntary transfer of a beneficiary’s interest in the trust assets. Spendthrift clauses are valid and enforceable under Michigan law.

With a spendthrift clause, the trust document very specifically directs the trustee on how to distribute the beneficiary’s entitlement. The specifications can include limitations such as paying only for a beneficiary’s basic living needs or making limited payments.

In some spendthrift trusts, the trustee has the power to cut off benefits to a beneficiary under specific circumstances. The benefits could be accumulated for later distribution or even paid to another beneficiary.

The trust document can also specify that the trustee may only make payments on behalf of the beneficiary. The trustee can then withhold direct cash payments from the beneficiary. Each spendthrift clause is drafted according to the specific situation that needs to be addressed.

In a trust with a spendthrift clause, the beneficiary is never a trustee. Instead, the trustee is another family member, trusted friend or professional, or even a corporate trustee such as a bank.

How Does a Spendthrift Clause Protect Trust Assets?

Michigan statutes recognize the validity of spendthrift clauses. These statutes also contain provisions relating to attempted distribution of assets by the beneficiary of a trust with a spendthrift clause. Typically, if a trust has a valid spendthrift provision, the property is not subject to enforcement of a judgment until it is distributed. That means the beneficiary cannot pledge the trust as security for a loan.

The Michigan law specifies narrow exceptions when the trust assets can be reached by a judgment creditor:

  • The child or former spouse of the beneficiary has a judgment or court order against the beneficiary
  • A judgment creditor provided services to “enhance, reserve, or protect” the beneficiary’s trust interest
  • The State of Michigan or the United States government has a claim against the beneficiary

If any of these exemptions apply, the court will order the trustee to pay the judgement out of distributions of income or principal as they become due. The exceptions do not apply to an interest of the beneficiary that is subject to discretionary distributions by the trustee.

Spendthrift Clauses Are Tailored to Each Individual Situation

A trust with a spendthrift clause is an ideal estate planning tool when a beneficiary has demonstrated irresponsibility with money. However, each spendthrift clause must be carefully drafted to accommodate the circumstances.

Making the clause too strict can result in a beneficiary not receiving money when there is a legitimate need. If the clause is too lenient and leaves wide discretion, the trustee may face a difficult situation. An irresponsible beneficiary may demand the release of trust assets or even try to have the trustee removed.

BRMM Attorneys Excel in Estate Planning and Spendthrift Trusts

Our estate planning attorneys at BRMM have served clients throughout the Tri-County and Detroit area for over 40 years. We are here to help with all your needs, including creating a trust with a spendthrift clause when appropriate. Our compassion, commitment, and credentials set us apart. Call us at (248) 213-9514 or complete our online form to set up your free consultation.

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