A spendthrift trust
is a trust that is created for the benefit of a person (often is unable to control spending) that gives an independent trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s of the beneficiary generally cannot reach the funds in the trust, and the funds are not actually under the control of the beneficiary.
The creator of a trust
In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator...
(whether or not it is a spendthrift trust) is sometimes called the "trustor", "grantor" or "settlor" of the trust. A trust often will not be treated as a spendthrift trust unless the trust agreement contains language showing that the creator intended the trust to qualify as spendthrift
. This is what is known as a spendthrift clause
or spendthrift provision
A spendthrift provision in an irrevocable trust prevents creditors from attaching the interest of the beneficiary in the trust before that interest (cash or property) is actually distributed to him or her. Most well drafted irrevocable trusts contain spendthrift provisions even though the beneficiaries are not known to be spendthrifts. This is because such a provision protects the trust and the beneficiary in the event a beneficiary is sued and a judgment creditor attempts to attach
Attachment is a legal process by which a court of law, at the request of a creditor, designates specific property owned by the debtor to be transferred to the creditor, or sold for the benefit of the creditor. A wide variety of legal mechanisms are employed by debtors to prevent the attachment of...
the beneficiary's interest in the trust.
Benefits of a Nevada Spendthrift Trust NRS 166.020
For example, the Nevada Property Code provides:
A. There is no personal or corporate income tax imposed by the state of Nevada.
B. A Irrevocable Spendthrift Trust if properly formed in the State of Nevada, is currently not subject to income taxes of other States, as long as the Nevada Spendthrift Trust is qualified to do business in the other State (s).
C. A Nevada Spend Thrift Trust is only subject to Federal Income Tax.
D. The Settlor has the right to change beneficiaries, or add other beneficiaries at anytime without notification to any beneficiary passed or present, or the state of Nevada, or the Federal Government.
E. All rights and privileges of a Spendthrift Trust formed in the State of Nevada are clearly set out in a concise set of statutes in Nevada and are not dependent on court decisions or interpretations for the validity of the Trust.
F. There are no registration fees, annual reporting fees or any other recurring fess charged by the State of Nevada or any local Government for the continued validity of the Trust. The Trusts are also not required to retain a Resident Agent in the State of Nevada.http://www.leg.state.nv.us/nrs/nrs-166.html
Benefits of a Texas Spendthrift Trust TPC 112.035
For example, the Texas Property Code provides:
- (a) A settlor may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal or in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee.
A clause in the terms of a trust agreement that complies with the above-quoted statute is an example of what the law calls an "anti-alienation provision".
To continue with the example of the Texas law, the Texas Property Code further provides:
- (b) A declaration in a trust instrument
A trust instrument is an instrument in writing executed by a settlor used to constitute a trust...
that the interest of a beneficiary shall be held subject to a "spendthrift trust" is sufficient to restrain voluntary or involuntary alienation of the interest by a beneficiary to the maximum extent permitted by this subtitle.
- (c) A trust containing terms authorized under Subsection (a) or (b) of this section may be referred to as a spendthrift trust.
The above-quoted language essentially means that a trust instrument does not (at least, in Texas) have to contain complex legal jargon to qualify the trust as "spendthrift"; simply using the word "spendthrift" in the trust document may be sufficient.http://law.onecle.com/texas/property/112.035.00.html
Necessaries, child support and alimony
Some creditors may compel payment out of the trust, particularly those who supply the beneficiary with "necessaries" (usually food and shelter, but sometimes clothing and transportation, if these are not extravagant). Most jurisdictions also permit the invasion of spendthrift trust assets to satisfy awards of child support
In family law and public policy, child support is an ongoing, periodic payment made by a parent for the financial benefit of a child following the end of a marriage or other relationship...
Alimony is a U.S. term denoting a legal obligation to provide financial support to one's spouse from the other spouse after marital separation or from the ex-spouse upon divorce...
Trusts where the beneficiary is also the creator
A trust created by an individual for his or her own benefit is sometimes called a "self-settled trust", and may be a kind of asset-protection trust
An asset-protection trust is a term which covers a wide spectrum of legal structures. Any form of trust which provides for funds to be held on a discretionary basis falls within the category. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy...
. If the creator of a self-settled trust is also a beneficiary of the trust, a particular problem in the context of protection of creditors and prevention of fraud is presented: the danger that the creator of the trust is trying to defraud creditors.
The general rule: Self-settled trusts do not protect the trust creator
To prevent individuals from creating trusts to defeat their own creditors, the laws of most states provide that a spendthrift clause in a trust document does not protect the beneficiary to the extent that the beneficiary is also the person who created the trust
. For example, Texas law provides:
- (d) If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.
Further, laws in some states (like Texas) are worded so broadly that anyone transferring property to the trust might be deemed to be a "creator" (i.e., settlor, grantor, or trustor), not merely the person or persons who originally set up the trust.
The exceptions: DAPT states
However, several states have changed their laws to provide that a person may create a self-settled spendthrift trust (i.e., a spendthrift trust for his or her own benefit). Such trusts are also called Domestic Asset Protection Trusts ("DAPT"), and sometimes informally called "Alaska trusts", as Alaska was a pioneer in allowing this kind of spendthrift trust. However, because of the danger of the misuse of Alaska trusts to defraud creditors, the legality of such trusts (to the extent that they purport to protect the trust share of a beneficiary who is also a creator of the trust) is uncertain in the states not allowing self-settled spendthrift trusts.
Nevada has enacted a series of statutes, codified at Chapter 166 of the Nevada Revised Statutes
The Nevada Revised Statutes are the current codified laws of the State of Nevada. Nevada law consists of the Constitution of Nevada and Nevada Revised Statutes. The Nevada Supreme Court interprets the law and constitution of Nevada...
, that specifically enable the creation of self-settled spendthrift trusts. This form of trust is commonly referred to as a "Nevada Asset Protection Trust". Under Chapter 166, an individual can serve as the settlor, trustee and beneficiary of the trust. This network of laws is specifically designed to protect trust assets from the claims of any creditor. NRS 166.170 specifically limits the circumstances under which a creditor may bring a claim. If a creditor existed at the time of the property's transfer to the trust, then the creditor must bring its claim against the trust within 2 years after the transfer or within six months after the creditor reasonably should have known of the transfer, whichever is later. NRS 166.170(1). If the creditor's claim surfaces after the transfer is made, the creditor must bring it's claim within two years after the transfer, regardless of notice. NRS 166.170(1). Moreover, the creditor can only sustain it's claim if it can prove by clear and convincing evidence (a tough evidentiary standard) that the transfer was made as a fraudulent conveyance
A fraudulent conveyance, or fraudulent transfer, is a civil cause of action. It arises in debtor/creditor relations, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by bankruptcy trustees...
. NRS 166.170(3).
It is unclear the extent to which sister states will recognize the asset protections of these DAPTs, like those created under the laws of Nevada and Alaska. relevant case law is somewhat sparse. While states are generally compelled to honor and recognize the laws of sister states, pursuant to the full faith and credit clause of the United States Constitution, some of these laws may be in direct conflict with the laws of other states. Some of these DAPT laws can be quite expansive. The scope of the Nevada law is drawn quite broadly to govern Nevada's enforcement of all trusts created within or outside the state, so long as they meet certain limited criteria. See NRS 166.015(1). The law goes on to require that the statutes be applied to the enforcement by any other state of any spendthrift trust created within Nevada, so long as the law is not in direct conflict with the other adjudicating state. NRS 166.015(3). In fact, the Nevada law does not even require that the trust assets be located within Nevada, so long as one of the trustees declares his/her domicile as Nevada. NRS 166.015(1)(d).
The following other states now have a DAPT statute: Delaware, South Dakota, Wyoming, Tennessee, Utah, Oklahoma, Colorado, Missouri, Rhode Island and New Hampshire.