Spendthrift Trust Clause

What Does Spendthrift Trust Clause Mean?

A spendthrift trust clause is a provision in a trust that prohibits a beneficiary from pledging or assigning future payments from the trust to a third party, typically a creditor.

This provision is also referred to as a spendthrift clause or a spendthrift provision.

Insuranceopedia Explains Spendthrift Trust Clause

The spendthrift trust clause was introduced to prevent beneficiaries from making impulsive or reckless financial decisions.

This clause involves three key parties: the grantor (the individual who establishes the trust), the trustee (the person responsible for managing it), and the beneficiary (the individual who will eventually benefit from the trust). Trusts that include this provision are often funded with permanent life insurance, since the policy’s cash value and death benefit give the trustee a predictable source of money to distribute under the restrictions the grantor sets.

When the grantor instructs the trustee to include this provision in the trust, the beneficiary is restricted from making financial commitments based on their future trust benefits. They cannot pledge payments to creditors or use their anticipated trust benefits as collateral. If a creditor demands payment from the trustee, the trustee can invoke this clause to deny the request. Because the clause limits what the beneficiary can do with future payments, it differs from the more flexible arrangements described in standard life insurance beneficiary rules, where the beneficiary usually receives the death benefit directly and can spend it however they wish.