How can a Spendthrift Clause in my Trust Protect my Beneficiaries?

Please note: The following is for informational purposes only and does not constitute legal advice. We strongly recommend consulting an experienced estate planning attorney before making any decisions related to your estate plan.

Protecting Inheritances for Your Beneficiaries:

The Spendthrift Clause

In estate planning, we are presented with a wonderful array of many different choices that allow us to truly customize an estate plan and to tailor it to one’s specific needs.  One of the considerations we face is whether we want to construct the estate plan to provide some protection to the beneficiaries from their creditors or divorcing spouses.  One of the ways we can protect a beneficiary’s inheritance is by making the distribution in their own trust, established under the grantor’s trust (or “Umbrella Trust”).  

This method of distribution is known as a sub-trust distribution, and could offer a layer of creditor protection for the beneficiaries if structured properly.  Finally, a sub-trust distribution could protect a beneficiary from themselves if they are not very financially savvy, are struggling with addiction, or are impulsive when it comes to large purchases.

When setting up a beneficiary’s sub-trust with the goal of protecting their inheritance, the grantor would typically pick a trustee that is someone other than the recipient beneficiary.  This means that someone more responsible or financially savvy can be in charge of managing the trust and for making distributions, while the beneficiary still receives their inheritance.

Additionally, it is absolutely imperative that the trust contain what is known as a spendthrift clause in order to shelter the sub-trust from creditors, lawsuits, and divorcing spouses.

What is a spendthrift clause?

A spendthrift clause is a set of provisions which offer protection from a beneficiary’s creditors.  A spendthrift clause is a combination of two provisions; the first prohibits the beneficiary from giving away their interest or inheritance, and the second clause prohibits the beneficiary’s creditors from accessing the beneficiary’s trust.

What is the actual language of a spendthrift clause?

The traditional spendthrift clause reads as follows:

“No beneficiary shall have the power to anticipate, alienate or assign any beneficial interest given him or her under this instrument, and no such beneficial interest is subject to being reached or applied by any creditor or other person in satisfaction of any claim against the beneficiary thereof.” 

What is the purpose of a spendthrift clause?

The purpose of a spendthrift clause is to ensure three things:  (1) the beneficiary actually receives their inheritance and does not assign or pledge it away;  (2) said inheritance is protected from creditors; and finally, (3) that the inheritance is protected from divorcing spouses.  

The first concern is protecting the beneficiary from themselves, through what is referred to as Voluntary Alienation.  A restriction on Voluntary Alienation is designed to prevent the beneficiary from using their inheritance as collateral for a loan or from the beneficiary giving it away via an assignment.

An example of this is if a trust has staged distributions, i.e., the beneficiary receives a predetermined percentage or amount of trust funds at predetermined ages. With staged distributions, that beneficiary could theoretically borrow against their future distributions.  This effectively nullifies the grantor’s intent to have the beneficiary wait until a specific age before receiving a set portion of their inheritance.  The solution to a Voluntary Alienation concern is to include a spendthrift clause in the trust, which prevents the beneficiary from borrowing against or assigning their interest in the trust.

The second concern that a spendthrift clause addresses is a protection from creditors, and is referred to as Involuntary Alienation.  Involuntary Alienation occurs when an inheritance is taken away from the beneficiary through no decision of their own, through something like a creditor lawsuit or divorce. 

When the grantor’s intent is to provide income only to a beneficiary over a period of time, the assets of the trust are typically not able to be reached by creditors.  See Drafting Wills and Trusts in Massachusetts at Pg. 38-1.  The case law in Massachusetts goes as far back as 1882 on this.  In Broadway Nat’l Bank v. Adams, the court stated that trust income could not be reached to pay a beneficiary’s debt where there was a clear intent on the part of the testator that the income not be assignable. 133 Mass. 170 (1882).

However, it is important to note that if the beneficiary actually receives a distribution, it could be up for grabs by a creditor or divorcing spouse:

“A spendthrift provision has the effect of prohibiting a creditor or assignee from reaching a beneficiary's interest in a trust, unless the beneficiary receives such distribution and the creditor then pursues a claim against the beneficiary individually.” (Pfannenstiehl, Note 11).

Conclusion re: Creditor protection and premature distributions

To protect a beneficiary from creditor claims, it is important to have a trustee that is not also the sole beneficiary; and to include express, standard language in the trust itself that limits the rights of the beneficiary to alienate their inheritance.  

The restraint on alienation (both voluntary and involuntary) has to be explicitly expressed in the trust, as mandated by the MUTC.  See 203E § 501, 502(a).

Spendthrift Provisions in a Divorce Context

To protect a beneficiary from a divorcing spouse, the situation gets more complex.  The trust should have the spendthrift language discussed above, it should provide the trustee with the discretion to distribute to the beneficiary, and such distributions should be subject to an ascertainable standard.

In Pfannenstiehl v. Pfannenstiehl, 475 Mass. 105 (2016), the Court held that, “[a divorcing spouse’s] beneficial interest in a discretionary spendthrift trust subject to an ascertainable standard with an open class of beneficiaries was too speculative to constitute a marital property interest”, and therefore not part of the marital funds to be split.  The takeaway here is that an ascertainable standard for distributions and an open class of beneficiaries strengthens the efficacy of the spendthrift clause.

However, in Levitan v. Rosen, 95 Mass. App. Ct. 248 (2019), the Court expanded guidance from Pfannenstiehl under a set of different facts.  In Levitan, the wife was sole beneficiary and trustee distributions were not subject to an ascertainable standard.  Instead, the wife (who was the beneficiary of a sub-trust), had the right to withdraw five percent of the trust principal.

The Levitan Court held that her interest was marital property because it was not an expectation of an interest.  Her interest was concrete enough to be considered a fixed and enforceable property right.  However, it was not divisible between the spouse because of the spendthrift clause, which made it only assignable to her.

Conclusion re: Divorce protection

To protect a beneficiary from a divorcing spouse, the grantor could be to make the method of distribution into a trust with an open class of beneficiaries, such as the Donor’s children, coupled with a clause granting the Trustee discretion to make distributions subject to an ascertainable standard, and without any withdrawal rights granted to the beneficiary.  

The following language could theoretically satisfy these goals:

“the Trustee shall pay to, or apply for the benefit of, a class composed of any one or more of the Donor’s then living issue such amounts of income and principal as the Trustee, in its sole discretion, may deem advisable from time to time, whether in equal or unequal shares, to provide for the comfortable support, health, maintenance, welfare and education of each of all members of such class . . . ,” See Pfannenstiehl.

Overall conclusion:

A spendthrift clause is a long recognized mechanism for protecting beneficiaries from creditors, divorcing spouses, and from themselves.  Although a spendthrift provision may not provide an absolute guarantee against a creditor or divorcing spouse, it is an important clause to consider including in your revocable trust. 

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