When you plan your estate, you are likely thinking about people you will be leaving behind and how to take care of them. One of the options that you have is an estate planning tool called a spendthrift clause. This post takes a closer look at this clause and how it may benefit you.
How a spendthrift clause works
A spendthrift clause lets you limit how your beneficiaries access their inheritance. In Rhode Island, if you set up an express trust, you can legally restrict beneficiaries from voluntarily or involuntarily transferring their trust interests. These rules prevent them from selling, assigning or pledging their share before they receive distributions.
By keeping assets in the trust rather than giving direct ownership, a properly drafted clause shields them from external threats.
Shielding assets from creditor claims
A key benefit of a spendthrift clause is that it protects your beneficiaries from creditors. Here is how this typically works regarding general debts:
- Most commercial creditors cannot take or garnish a beneficiary’s share of the trust before distribution
- The beneficiary cannot use their future inheritance as collateral for a loan
- Civil judgments against the beneficiary do not automatically reach the trust assets
- This protection covers various types of debt, including credit cards, lawsuits and business obligations
Rhode Island also allows Domestic Asset Protection Trusts (DAPTs), which offer stronger protection but must be carefully structured. It must be irrevocable, governed by state law, include spendthrift provisions and name a qualified trustee.
Important limitations to consider
While spendthrift clauses offer significant protection, they do not provide unlimited security. First, spendthrift protection only applies to third-party trusts, not self-settled trusts in most circumstances.
While spendthrift clauses offer significant protection, they are not unlimited. They generally apply only to third-party trusts, not self-settled trusts.
A self-settled trust is one you create for your own benefit. Traditional spendthrift protections usually do not shield assets in these trusts. Rhode Island does allow DAPTs, but they involve complex rules and typically require professional guidance.
Even so, protection ends once assets leave the trust. For example, if a trustee distributes $50,000 to a beneficiary, that money is then subject to creditor claims.
Additionally, spendthrift clauses cannot protect against all creditors. Courts allow exceptions for obligations such as child support or alimony. A beneficiary cannot use a spendthrift trust to avoid supporting their children or paying alimony.