Often, people see language in a trust referencing that the trust is a "spendthrift trust," and they ask us the meaning of a spendthrift trust.
Most trusts are spendthrift trust. When a trust is classified as a spendthrift trust, it often means, in layman's terms, that a beneficiary may not sell their interest in the trust or use it as collateral for a loan, and that a creditor cannot seize a beneficiary's interest in a trust.
Note that if spendthift language is not included in a trust instrument, then a beneficiary may transfer or encumber their interest in the trust.
Let's take a look at an example. Grandpa dies and leaves $100,000 to Grandson in trust, and Grandpa provides that trust assets may be used for Grandson's education, and when Grandson reaches the age of 35, remaining trust assets may be disbursed to Grandson.
If Grandson was permitted to voluntarily alienate his interest in the trust, then Grandson could sell his interest in the trust or use it as collateral for a loan. And if the trust were not a spendthrift trust, then a creditor of Grandson could seize Grandson's interest in the trust.
Nonetheless, there are two circumstances where a creditor of a beneficiary may seize an interest in trust. First, if the beneficiary can voluntarily alienate his interest in the trust, then a creditor of the beneficiary can seize that beneficiary's interest in income or principal that could be voluntarily alienated. Second, a beneficiary's interest in income or principal can be seized to the extent that the beneficiary donated property to the trust, either directly or indirectly.
The key to restraining alienation by a beneficiary to the maximum extent permitted by the Louisiana Trust Code is to declare in the trust instrument that the interest of a beneficiary shall be held subject to a "spendthrift trust."
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Louisiana Estate Planning Attorney
Phone: (225) 329-2450