Proper estate planning involves the protection and preservation of your legacy. Sometimes these goals require limiting an heir’s ability to rapidly deplete their inheritance. Typically, estate planning professionals use “spendthrift provisions” to protect loved ones from poor financial decisions, and importantly, to shield trust property from a beneficiary’s creditors.
A spendthrift provision is an instrument that restrains the voluntary or involuntary transfer of a beneficiary’s interest in a trust. See RSMo. § 456.5-502. By limiting a beneficiary’s ability to sell, transfer, or otherwise encumber their interest in a trust, you can also limit a future creditor’s ability to reach that trust property. Furthermore, a spendthrift trust operates to distribute property to your heirs incrementally instead of all at once.
What Happens when a Trust Does Not Contain a Spendthrift Provision?
Generally, a creditor cannot reach the underlying assets of a trust because a beneficiary has no right to these assets. However, without a spendthrift provision, creditors can reach a beneficiary’s interest by attachment to present or future trust distributions. If the creditor successfully attaches to a trust’s distributions, then the distribution must be made directly to the creditor instead of to the beneficiary. Among other remedies, creditors can also force a sale of the beneficiary’s interest in the trust.
Spendthrift Trusts are a Powerful Tool Against Creditors
If a trust contains a valid spendthrift provision, then a creditor cannot force the trustee to make distributions or force a judicial sale of a beneficiary’s interest. A creditor may only attempt to collect from the beneficiary directly after their receipt of trust property. This means a trustee can seek to avoid the reach of creditors by purchasing assets in the name of the trust or by spending trust assets for the benefit of the beneficiary.
Spendthrift trusts can help you manage and preserve your legacy by protecting your heirs from themselves and their creditors. If you would like to speak to an experienced estate planning attorney, please call WM Law to set a free initial consultation. Our telephone number is 913-422-0909. At WM Law, We are Here to Help!