If you plan to pass down a moderate to large estate, you undoubtedly hope that the inheritance to leave to loved ones is not squandered. Fortunately, there is an estate planning tool that can help ensure that doesn’t happen. The Minot trust attorneys at German Law explain how a spendthrift provision in a trust agreement can help protect the assets you leave behind for loved ones.
What Is a Trust Agreement?
At its most basic, trust is a relationship whereby property is held by one party for the benefit of another. The terms and provisions of a trust are reduced to writing in a document referred to as a “trust agreement.” Trusts are broadly divided into living trusts and testamentary trusts with the former activating during the lifetime of the Settlor (the creator of the trust) and the latter typically being activated at the time of the Settlor’s death by a provision in the Settlor’s Will. Living trusts can be further sub-divided into revocable and irrevocable living trusts while a testamentary trust is always revocable because a Will is always revocable.
What Is a Spendthrift Provision?
For many people, the idea of simply handing over an inheritance without any control over how it is used doesn’t sit well. A trust can help because one of the many benefits to using a trust instead of a Will to distribute an inheritance is the ability to retain a certain amount of control over how that inheritance is used. A spendthrift clause, or a spendthrift trust, refers to a clause within a trust or a trust agreement in general that is aimed at preventing the beneficiaries of the trust from squandering their inheritance. Very specific language must be used to create a spendthrift clause; however, when drafted properly, a spendthrift clause will prevent a beneficiary from spending the trust funds frivolously as well as prevent borrowing against those funds or encumbering the funds in any way. A spendthrift clause can also prevent creditors of the beneficiary from accessing the trust funds to pay debts of the beneficiary.
Because the Settlor of a trust has wide latitude when creating the trust terms, a Settlor can use those terms to limit how a beneficiary may use trust funds and may direct the Trustee to make distributions directly to a landlord, school, physician instead of to the actual beneficiary. This is another way a Settlor can protect against the possibility of a beneficiary squandering trust assets.
State laws govern most aspects of trust agreements, including the validity of a spendthrift clause as well as the protection offered by the clause. Most states, however, have laws that recognize the validity of a spendthrift provision to prevent both voluntary and involuntary transfers of a beneficiary’s interest in the trust. An “involuntary” transfer refers to a creditor attaching a lien to the beneficiary’s interest. In North Dakota, Section 59-13-02. (502) of the Century Code governs spendthrift provisions, making such a provision valid if it “restrains either the voluntary or involuntary transfer or both the voluntary and involuntary transfer of a beneficiary’s interest.”
Limits to the Protection Offered by a Spendthrift Clause in North Dakota
While a spendthrift clause can provide both the Settlor and the beneficiary of a trust a great deal of protection against the loss of trust assets, there are limits. Most states, for example, will not extend the protection offered by a spendthrift clause to debts such a child or spousal support as well as government debts such as taxes. Some states also limit the dollar value of assets that can be protected by a spendthrift provision in a trust agreement. In North Dakota, a spendthrift provision is unenforceable against:
- A beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance.
- A judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust.
- A claim of this state or the United States to the extent a statute of this state or federal law so provides.
Contact Minot Trust Attorneys
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about spendthrift provisions within a trust, or about trusts in general, contact the Minot trust attorneys at German Law by calling 701-738-0060 to schedule an appointment.