Spendthrift Provisions

A spendthrift provision in a trust prevents beneficiaries from selling or giving away their interest in the trust until they actually receive distributions. However, if the person who created the trust is also the beneficiary (a self-settled trust), they cannot use this provision to protect their own interests from creditors.

John creates a trust for his son, Tim, with a spendthrift clause that prevents Tim from selling his interest. Tim's creditors cannot reach his interest in the trust until he receives distributions. However, if John had created a self-settled trust for himself with a spendthrift provision, his creditors could still access his retained interest. Thus, Tim's interest is protected, but John's is not.

Spendthrift provisions protect beneficiaries, but not self-settled interests!

Exams often present scenarios where students must distinguish between self-settled trusts and third-party trusts, leading to confusion about the applicability of spendthrift provisions.

Questions frequently involve fact patterns with trusts that include spendthrift clauses, testing the candidate's understanding of the limitations on self-settled trusts and creditor rights.