A Protected Inheritance: Spendthrift Trusts for Beneficiaries

Anyone leaving substantial means to their beneficiaries may want to consider doing so via a trust structured as a spendthrift trust. A spendthrift trust can provide advantages to nearly any beneficiary, regardless of his or her spending habits. When properly drafted, a spendthrift trust operates for the benefit of the beneficiary and to the exclusion of his or her creditors (present or future). Creditors are a broad group, encompassing anyone to whom the beneficiary may at any point in the future owe money. This could be a credit card company, an ex-spouse, a car accident injury victim, or even the IRS. The spendthrift trust generally operates by preventing the beneficiary from alienating the trust assets. Maryland and most other states recognize the validity of such spendthrift trusts to the exclusion of most creditors. Some states have more liberal policies than others for what type of trust qualifies as creditor-proof: for example, under Maryland law, a beneficiary can serve as Trustee of his or her trust while retaining the creditor protection over the assets assuming the other requirements are met. In states where this is true, a spendthrift trust can offer ample benefits to the beneficiary over outright inheritance without requiring him or her to lose substantial control over the assets.

The spendthrift trust can be established in a will or in an intervivos trust (that is, one created during lifetime) and essentially establishes an almost untouchable nest egg for a future beneficiary.

In some instances, enforcement of spendthrift provisions is considered to be against public policy. The enforcement varies on a state-by-state basis. Notably, in Maryland, present or future distributions to beneficiaries that are subject to spendthrift provisions under the language of a trust can be reached by 1) children or spouses who have a judgment or court order against the beneficiary for support or maintenance; 2) judgment creditors of the beneficiary who provided services to protect the beneficiary’s interest in the trust; and 3) claims of Maryland or the United States to the extent provided by statute. Certain types of creditors, like the IRS also have special powers to reach assets of debtors. When dealing with these types of creditors, additional protections can be put into place to prevent the assets from being used to satisfy judgments. Despite these limitations, assets inherited in a spendthrift trust are far more likely to withstand creditor claims than those inherited outright.

1. A typical spendthrift trust is not the ideal inheritance vehicle for any beneficiary who relies on means tested public benefits.
2. Although the trust would not be considered a marital asset in a divorce, the ex-spouse can attach distributions from the trust to the beneficiary to satisfy support requirements. It appears from the language of the statute that the ex-spouse could not reach any assets in the trust that are not required to be paid to the beneficiary and are not in fact distributed to the beneficiary. This statute was recently enacted and the language has not yet been interpreted by a court.