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If you want to pass wealth to heirs but have concerns about their spending habits, a spendthrift trust could be the right choice for you. A spendthrift trust restricts a beneficiary’s access to trust funds and lets the trustee decide when and how money is distributed. This arrangement has several benefits. In addition to protecting funds from beneficiary overspending and misuse, a spendthrift trust can shield assets from many types of creditor claims while the funds remain within the trust structure. The spendthrift clause serves as a protective barrier, preventing both voluntary transfers by the beneficiary and involuntary seizures by creditors.
What Is a Spendthrift Provision in a Trust?
A spendthrift provision is language within a trust document that restricts how heirs can access or transfer their interest in the trust. Under Arizona law, a spendthrift provision must clearly restrict both voluntary and involuntary transfers of a beneficiary’s interest to be valid.
A typical spendthrift clause says that a beneficiary cannot sell, give away, or use their trust interest as collateral, and that creditors cannot take trust money before it is actually paid to the beneficiary. This rule must be clearly written into the trust. A trust is not a spendthrift trust unless it includes this kind of language.
How Does a Spendthrift Trust Protect Assets From Creditors?
A spendthrift trust safeguards assets by keeping them out of the beneficiary’s direct possession. As long as spendthrift trust assets remain within the trust, they are generally beyond the reach of most creditors, subject to certain legal exceptions. A creditor typically cannot pursue trust funds or attach an interest in future distributions.
By placing distributions at the trustee’s discretion, creditors usually cannot compel payment from the trust, adding an extra layer of protection. The beneficiary’s creditors must wait until funds are actually distributed to attempt collection.
Additionally, beneficiaries cannot use anticipated distributions to secure credit, preventing lenders from extending loans based on future trust income. These limits help insulate trust assets from many creditor claims and unwise borrowing while preserving the trust’s purpose of protecting wealth for the intended beneficiaries.
Limitations: When Creditors Can Still Reach Spendthrift Trust Assets
Spendthrift provisions do not provide absolute protection. Arizona law permits certain creditors to reach trust distributions despite spendthrift language. These exceptions to the spendthrift provision law include payment for child support obligations, spousal maintenance, and restitution orders. Government claims, particularly tax obligations, can also attach to distributions.
Once a trustee exercises discretion and distributes money to a beneficiary, those funds become vulnerable to creditor claims. The protection applies only while assets remain within the trust. After distribution, creditors may pursue those funds to recover debts incurred after the beneficiary received payment.
Working with an attorney can help determine whether a spendthrift trust is appropriate for your situation and how to structure its provisions for maximum protection. A lawyer can draft language that clearly restricts transfers while complying with Arizona law.
Contact Our Arizona Spendthrift Trust Lawyers
As you plan your estate, a spendthrift trust could be a valuable tool for protecting your funds from overspending and creditors. Reach out to the experienced Arizona trust lawyers at Pennington Law, PLLC. With years of experience in estate planning and wealth management, our law firm can help you develop a comprehensive strategy to provide for the people you love while minimizing financial risks. Call or contact us today for a free consultation.
