An Irrevocable Trust for a Spendthrift Beneficiary's Use of Real Property

by Erika Johansen

An irrevocable spendthrift trust composed of real property allows a party to use that property, while protecting the property from any sort of transfer. Spendthrift trust rules may depend greatly upon the law of the state in which the trust is created; if you have questions about a specific trust, seek local legal advice.

Irrevocable Trust

Trusts are an investment arrangement distinguished by the fact that one party has legal ownership of the invested assets (known as the "res"), while another party has the right to use of the assets. This second party, known as the beneficiary, can use but not control the assets. In an irrevocable trust, the original owner of the assets, known as the settlor, gives the assets over for good to the new legal owner, known as the trustee. The arrangement is designed to be permanent; in a typical irrevocable trust, the arrangement can only be revoked with the consent of all parties to the trust.

Spendthrift Trusts

A spendthrift trust is a type of trust designed to give the beneficiary the use of the assets, while preventing him from either transferring the trust assets himself, or being forced to transfer the assets in order to satisfy the claims of creditors. A real property spendthrift trust, for instance, might be structured so that the beneficiary could live on the property, but have no power to sell or encumber the property. That power would rest only with the trustee. Likewise, if any party won a suit against the beneficiary, the trust would not allow that party to attach the real property in order to satisfy the judgment.

Trust Code Requirements

Each state has its own trust requirements. Some states don't honor spendthrift trusts at all. Of the states that do, many states follow the Uniform Trust Code, which demands that some provision of the trust explicitly prevent the beneficiary from both forms of transfer, voluntary and involuntary, or else use the actual term "spendthrift trust" to achieve the same result. However, the Code also notes that once a beneficiary has actually received assets from the trust (for instance, income from real property), then a creditor may have the right to seek those assets to satisfy a judgment.

Spendthrift Exceptions

States that recognize spendthrift trusts typically also recognize exceptions to those trusts' transfer rules. For example, Uniform Trust Code Section 503 allows creditors to demand spendthrift trust property when those creditors are children, spouses or former spouses of the beneficiary, when the creditor has a valid order of child support, when the creditor has provided services and won a judgment against the beneficiary, or when the creditor is a U.S. state or the federal government. Some states also allow transfer to alimony and tort creditors.

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