Trusts

FAQs About Trusts

What is a Spendthrift Trust?

by Rania Combs

As parents, we all do our best to instill our good values in our children. But sometimes, despite all our guidance, our children make poor personal and financial decisions.

Their poor judgment may be due to a lack of maturity that is temporary. Or it may be due to a long-term problem stemming from alcohol and drug abuse or another addiction. Whatever the reason, you know that they will squander any hard-earned money you leave to them when you die within a short amount of time.

But does this mean that you should disinherit your spendthrift child? Not at all. If you would like to give assets to a loved one but are concerned about their lack of judgment, a spendthrift trust may be the solution.

What is the benefit of a Spendthrift Trust?

A spendthrift trust is a trust created for a beneficiary that prohibits the beneficiary from selling, giving away, or otherwise transferring the beneficiary’s interest in the trust assets. This prevents the beneficiary’s creditors from reaching the beneficiary’s interest in the trust.

Rather than distributing property outright, the creator of the trust (the settlor) appoints a trustee to manage trust assets for the beneficiary. The beneficiary’s creditors can reach assets that the trustee has already distributed to the beneficiary. But with few exceptions, creditors cannot compel the trustee to pay outstanding claims from assets that remain in the trust.

How Does One Create a Spendthrift Trust?

Creating a spendthrift trust is easy. The Texas Estates Code only requires language showing that the settlor of t intended it to qualify as a spendthrift trust. Simply saying “this is a spendthrift trust” is sufficient. No other special language is required.

Does the Beneficiary have to be a Spendthrift?

There is no prerequisite that the settlor proves that the beneficiary is actually incapable of managing his or her money. You can create a spendthrift trust for anyone, even a responsible adult beneficiary! As a result, most trusts include spendthrift provisions as an extra layer of protection for the trust’s beneficiaries.

Sounds Great! Can I Create One for Myself?

All of us would like to protect our assets from attachment by creditors; however, Texas considers self-settled spendthrift trusts against public policy. A spendthrift provision does not invalidate a trust but also does not protect the trust assets from creditors.

Note, however, the Texas legislature made some changes to the Texas Property Code that seems to have created a back door to a self-settled asset protection trust. For more information read: Did Texas Create a Back Door for a Self-Settled Asset Protection Trust?

Do you have a loved one who makes bad personal and financial decisions? If so, a spendthrift trust can help you provide for him or her while ensuring that the assets you’ve worked hard to accumulate your whole life are not squandered away.

Click on the link to learn more about creating a Trust in Texas –>

This article was originally published on November 28, 2012, and updated on February 26, 2021.


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Comments

  1. Dora

    July 7, 2016 at 6:06pm

    Is there a type of trust that can be set up other than a spendthift that will protect a beneficiary’s assets from possible lawsuits or creditors and assure that the beneficiary will have enough finances for the rest of his/her life?

    1. Rania Combs

      July 9, 2016 at 12:15pm

      A spendthrift trust will accomplish your goals.

      1. shannon

        January 5, 2020 at 12:41pm

        Could the beneficiary lose all his yearly distribution as the result of a lawsuit?

        1. Rania Combs

          January 8, 2020 at 6:24pm

          Distributions from the trust to the beneficiary are exposed to claims of creditors. Once trust property is in the beneficiary’s hands, creditors can reach it.

  2. Anonymous

    May 5, 2019 at 10:59am

    What if the beneficiary commits a criminal crime can the trust be sued by the victim

    1. Rania Combs

      May 6, 2019 at 11:04am

      Trusts are not legal entities in Texas, and therefore cannot be sued. A suit against a trust must be brought against the trustee. That being said, a trust that contains spendthrift provisions will generally prevent the beneficiary’s creditors from reaching the beneficiary’s interest in the trust.

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