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What is a spendthrift provision?

_ Sept. 6, 2022

What is a spendthrift provision?

 No one really knows how life will turn out for the loved ones we leave assets to in a will or trust. The beneficiary could use our assets to pay off emergency purposes only, pay off debt, or a variety of other reasons. On the other hand, the beneficiary could decide to have a good time, run up massive bills, or invest in a money-making venture that doesn’t work out. The inclusion of a spendthrift provision protects a beneficiary by preventing a creditor from attaching prior debt against the inheritance, and also prevents the beneficiary from acquiring debt based upon a future inheritance.

The Code of the District of Columbia (specifically § 19–1305) discusses spendthrift provisions in detail. An important point to note is that a spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary’s interest. With a spendthrift provision, a creditor cannot seek an asset (gain a secured interest in the asset) when the assets are in a trust; however, once the asset leaves the trust then it is the property of the beneficiary and the creditor can then seek to take the asset to settle a claim.

Let’s use a real example to illustrate the spendthrift provision. A parent creates a trust with a spendthrift provision that includes a child as the sole beneficiary. The parent unfortunately passes away. Unknown to the parent, the child has a serious problem with money and is routinely investing in “sure bets” that, while exciting, lose all of value of the investment. Over time, the child has incurred large debts that he cannot repay. With the spendthrift provision, creditors cannot seek to take the assets of the trust from the child. However, once the child is paid from the trust and the creditor learns about it, the creditor can seek to use these funds, now outside the trust, to settle the debt the child owes. Also, the child cannot borrow against the value of the assets in the trust to fund another venture – this is not allowed either. 

One final note: one exception to the spendthrift provision can be found in § 19–1305.03(b). If a beneficiary has a child that is due a payment for child support or maintenance, the beneficiary cannot use the spendthrift provision to frustrate paying child support. This is an important exception to a spendthrift provision clause.