spendthrift clause


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Related to spendthrift clause: spendthrift trust

spendthrift clause

n. a provision in a trust or will that states that if a prospective beneficiary has pledged to turn over a gift he/she hopes to receive to a third party, the trustee or executor shall not honor such a pledge. The purpose is to prevent a "spendthrift" beneficiary from using a potential gift as security for credit on a speculative investment. Example: Junior Jones is talked into an investment in Florida swampland, but has no money in hand to pay for it. So he tells the developer he will soon receive $50,000 from his aunt's trust, and signs an assignment of the expected $50,000 to the developer. When the aunt dies, the trustee must ignore the developer's demand for payment based on the written assignment, but may pay the funds directly to Junior. (See: trust, will)

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The inclusion of spendthrift clauses in trusts has been a controversial issue since these clauses were first recognized and enforced by the courts.
If stocks in a C or S corporation are transferred, accumulated distributions on the stock may be protected from both the transferor's and the transferee's creditors by the spendthrift clause.
The fact that spendthrift clauses are unenforceable against these exception creditors means only that these creditors have remedies against a beneficiary's interest similar to those of creditors of beneficiaries with interests in a trust that does not include a spendthrift provision.
Bankruptcy Code, a spendthrift clause is enforceable if it is "enforceable under applicable non-bankruptcy law.