spendthrift trusts

 March 24, 2022

In this podcast, John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank, in Gloucester, Massachusetts, explains spendthrift trusts. He talks about how they work and why they're a provision in most trusts that are created.

Listen to Podcast

Podcast Transcription:

Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher, and I'm here today with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank, in Gloucester, Massachusetts. Today, we're talking about spendthrift trusts. Welcome, John.

John Brennan: Hi, John.

What Are Spendthrift Trusts?

John Maher: So John, what is a spendthrift trust?

John Brennan: Well, John, I don't even really think of spendthrift trust as a sort of specific type of trust. Trusts can be what we call asset protection, but it's sort of a question of how much. Almost every trust, every Massachusetts trust, has a spendthrift provision. So that is something that limits who the trustee can direct their assets towards. The design of a provision like this is to thwart creditors to a certain extent and prevent a beneficiary from alienating their benefit. So, they're typically a part and parcel of irrevocable trusts, and they provide a degree of asset protection.

How Do You Create Spendthrift Trusts?

John Maher: Okay. How do you go ahead and create a spendthrift trust? 

John Brennan: Well, I would say most every trust has a spendthrift quality because there's a clause in the trust that says there's a restriction on alienation, is how they call it. The strength of those protections will depend upon state law. So different states will have different degrees of protection for assets held in trust.

Massachusetts, for example, protects against voluntary and involuntary alienation. So, a debtor could not attach debts to someone's inheritance, for example, but the beneficiary of that inheritance could not borrow against it prior to receiving anything. So that's kind of a good example; you think of asset protection that sometimes comes up in cases of divorce, or because spouses are creditors or estranged, spouses are creditors. So, that's where sort of the creditor protection piece comes in.

Pros and Cons of Spendthrift Trusts

John Maher: Okay. What are some of the pros and cons of a spendthrift trust?

John Brennan: Well, the biggie is obviously the asset protection piece, and that can be a great benefit. The cons on something like this is there's kind of different types of trusts in their spendthriftiness, for lack of a better term. What are the questions? Let's say you were a trust beneficiary, and a creditor was saying, "John's not paying his bills. He has money in his trust. I want to see how he gets paid." The court would look at whether the trust in question was something you created and say, I'm creating a trust to protect all my benefits. Court would say, "Hey, you created that yourself. I think we're going to look through that and really grab these benefits."

Or if it was something your dad created and it wasn't something you created, so it's not self-settled. It was something created by somebody else for you, that would probably strengthen the protection. And then also the questions around it would be, maybe some of your obligations, these rules also are still in play. A lot of the laws settled about a lot of things, but the degree to which someone receives benefit from these spendthrift clauses is always being tested by new and crazy facts as people do newer and crazier things. So, it's still something that the law looks at from time to time.

Who Uses Spendthrift Trusts?

John Maher: Okay. And who is a spendthrift trust generally used for?

John Brennan: Anybody, pretty much anybody. It's almost a universal clause in a trust.

The Degree to Which Spendthrift Trusts Protect Assets

John Maher: All right. So why don't you go ahead and sort of summarize your thoughts on spendthrift trusts for us?

John Brennan: Like I said, Spendthrift trusts… it's something that's probably in almost every trust. It's just a question of how much and those circumstances will depend on how the trust was created. Who created it? And whether you created it or the trustor created it, or whether you're a beneficiary and then also the obligation.

The court, if it's something like somebody complaining about a bill and trying to reach the assets, might look at it differently than, say, a mother who is suing a husband who has not been paying their child support. So, the degree, the circumstance of the protection will matter, but there is sort of a presumption when you have a spendthrift clause in your trust that there's going to be a certain bar to getting those assets. It's just a question of how high.

Contact Cape Ann Savings Bank to Learn More

John Maher: All right. Well, that's really great information, John. Thanks again for speaking with me today.

John Brennan: Sure thing, John.

John Maher: And for more information, contact Cape Ann Savings Trust and Financial Services at (978) 283-7079. Or visit the website at capeannsavings.bank.

Investments purchased from the Cape Ann Savings Trust and Financial Services Department are not FDIC insured, not FDIC, guaranteed, not bank guaranteed, and may lose principal value.