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 initial South Dakota statutes were similar to Alaska's in that the self-settled trust instrument must: (1) expressly incorporate South Dakota law to govern validity, construction, and administration of the trust; (2) be irrevocable; (3) contain a spendthrift clause; and (4) have assets that were not transferred with intent to hinder, delay, or defraud creditors.
(38) Since 1875, American courts have applied the maxim "cujus est dare, ejus est disponere," which means, "[wjhose it is to give, his it is to dispose." (39) Accordingly, spendthrift clauses are routinely used in the United States to protect a settlor's right to dispose of his or her assets.
Conversely, those in support of spendthrift clauses argue that the settlor of a trust for the benefit of another should be able to attach to it such restrictions.(65) Moreover, they argue that spendthrift trusts are valuable in providing for and protecting unknowledgeable and incompetent beneficiaries.(66) Furthermore, proponents of these trusts maintain that the trusts do not have the effect of defrauding creditors because creditors can inquire into a beneficiary's source of income, get a credit report, or condition the giving of credit upon a statement of assets.(67)
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.
If there is no spendthrift clause and the beneficiary transfers his discretionary interest, the trustee will be liable to a creditor for any distributions the trustee makes to the beneficiary after notice that the beneficial interest has been transferred to the creditor.
Second, because the new exemptions for retirement accounts are explicitly tied to their exemption from taxation, Patterson's distinction between retirement accounts in qualified plans that are covered by an ERISA spendthrift clause and those that were not so covered are no longer analytically useful.
The essential elements are: 1) the trustee must be a Delaware resident, or an entity authorized by Delaware law to act as a trustee; 2) the Delaware trustee must maintain or arrange for custody in Delaware of at least some of the trust's assets; 3) the trust agreement must provide that Delaware law governs the validity, construction, and administration of the trust; 4) the trust must be irrevocable and contain a spendthrift clause; and 5) the settlor cannot retain the power to serve as trustee, or the power to direct distributions from the trust or to demand a return of assets transferred to the trust.
Bankruptcy Code, a spendthrift clause is enforceable if it is "enforceable under applicable non-bankruptcy law." In other words, if the assets of a trust are not subject to the claims of the settlor's creditors under state law, those assets will not be subject to the claims of creditors under federal bankruptcy laws.
Given this environment, it is likely that the courts in these states will continue to issue judgments that provide creditors access to the assets in out-of-state trusts, despite spendthrift clauses (i.e., DAPT states must recognize other state's judgments under the Full Faith and Credit clause of the U.S.
Most states have statutes or judicial law that specifically permit "spendthrift clauses" for annuity or life insurance settlement options.