What is a Spendthrift Clause?
A spendthrift clause, also known as a spendthrift provision, is language included in a will or trust that restricts a beneficiary’s access to their inheritance. It’s designed to protect the assets from the beneficiary’s creditors, as well as from the beneficiary’s own potentially irresponsible spending habits.
In North Carolina, under G.S. 36C-5-502, a spendthrift provision is only valid if it restrains both voluntary and involuntary transfer of a beneficiary’s interest. The statute also notes that using terms like “spendthrift trust” or similar wording is sufficient to invoke this protection.
A spendthrift clause is basically saying that the beneficiary has an interest in the trust and nothing more. That means the interest they receive can’t be assigned to a third party, can’t be used as collateral for a loan, can’t be advanced in any way, and can’t be claimed by third parties—like creditors or anyone else trying to collect on a debt. So things like a divorce, a personal injury plaintiff suing them for money, or defaulting on a debt of their own—all of those claims are prevented from reaching the beneficiary’s interest in the trust.
Why You Might Need a Spendthrift Clause
There are several reasons why you might consider including a spendthrift clause in your estate plan:
- Concerns about spending habits: If you worry that your heir might frivolously spend their inheritance, a spendthrift clause can ensure the money lasts longer.
- Addiction issues: If your beneficiary struggles with gambling, drugs, or other addictions, a spendthrift clause can prevent them from using their inheritance to fuel destructive habits.
- Creditor protection: A spendthrift clause can shield the inherited assets from your beneficiary’s creditors. This is particularly important if your heir is in a high-risk profession or has significant debts.
- Divorce protection: In the event of your beneficiary’s divorce, a spendthrift clause can help keep the inheritance from being considered marital property and divided in the settlement.
- Incentivizing certain behaviors: You can use a spendthrift clause to encourage positive behaviors, like completing education or maintaining employment, by tying distributions to those milestones.
How a Spendthrift Clause Works
When you include a spendthrift clause in your will or trust, you’re appointing a trustee to manage the inherited assets on behalf of your beneficiary. The trustee has a fiduciary duty to follow the terms you’ve set out in your estate plan.
Typically, this means the trustee will invest the assets and make distributions to the beneficiary according to your instructions. You might specify that the beneficiary receives a monthly allowance, with extra distributions for specific needs like healthcare or education. Or you might tie distributions to certain ages or milestones.
Under North Carolina law, a beneficiary cannot transfer their interest in a trust if it violates a valid spendthrift provision. Moreover, creditors or assignees of the beneficiary generally cannot access the assets or distributions before the beneficiary receives them.
Importantly, the beneficiary has no direct control over the inherited assets. They can’t demand the trustee turn over the funds, and they can’t pledge the assets as collateral for a loan. This lack of control is what provides the protective benefits of the spendthrift clause.
Spendthrift Clauses & Creditors
One of the primary advantages of a spendthrift clause is the protection it offers from the beneficiary’s creditors. Because the beneficiary doesn’t have direct access to the funds, creditors can’t come after the inherited assets to satisfy debts.
This protection applies to debts incurred both before and after the inheritance. So, if your heir is a doctor who’s concerned about potential malpractice lawsuits or an entrepreneur with some risky business ventures, a spendthrift clause can provide a layer of protection.
There are some exceptions to this creditor protection. For example, a valid child support claim might be able to reach spendthrift trust assets. And if the trustee has already distributed assets to the beneficiary, those distributions are fair game for creditors. But in general, a spendthrift clause offers significant safeguards.
Personalizing Your Spendthrift Clause
Like all aspects of estate planning, spendthrift clauses aren’t one-size-fits-all. The terms of your clause should be tailored to your family’s unique circumstances. That’s where our personalized approach at Cary Estate Planning comes in.
When you contact us for a Discovery Call, we’ll take the time to understand your family dynamics, your financial situation, and your long-term goals. Then, in your Initial Strategy Meeting, one of our experienced attorneys will walk you through your options and help craft a spendthrift clause that meets your specific needs.
Some factors you might consider when personalizing your spendthrift clause include:
- The age and maturity of your beneficiaries
- Any specific concerns about spending habits or addictions
- Your beneficiaries’ career paths and potential liability risks
- The size of the inheritance and your goals for how it will be used
- Milestones or behaviors you want to incentivize
Our attorneys will help you weigh these factors and design a clause that provides the right balance of protection and flexibility for your heirs.
Is a Spendthrift Clause Right for You?
While spendthrift clauses offer many benefits, they’re not right for every situation. In some cases, the restrictive nature of the clause can breed resentment among beneficiaries. And if your heirs are responsible and financially savvy, you may not feel the need for the added protection.
Ultimately, the decision to include a spendthrift clause in your estate plan is a personal one that depends on your unique family circumstances. That’s why the personalized guidance you’ll receive at Cary Estate Planning is so valuable.
Our attorneys will take the time to understand your situation and your goals. We’ll help you weigh the pros and cons of a spendthrift clause and determine if it’s the right fit for your estate plan. And if you do decide to include a spendthrift clause, we’ll work with you to craft language that provides the protection you need while still honoring your wishes for your heirs.
Protect Your Legacy with Cary Estate Planning
At Cary Estate Planning, we understand that your estate plan is about more than just distributing assets. It’s about protecting your legacy and ensuring your hard-earned wealth benefits your loved ones in the way you intend.
A spendthrift clause is just one of the many tools we can use to help you achieve those goals. Our personalized approach means we’ll take the time to understand your unique needs and craft a comprehensive estate plan that provides peace of mind for you and protection for your heirs.
If you’re ready to explore how a spendthrift clause might fit into your estate plan, contact us today to schedule your Discovery Call. Our experienced attorneys are here to guide you through the process and help you create a plan that secures your legacy for generations to come.
