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Helping You Navigate Complex Legal Issues

Achieving asset protection through a spendthrift trust

Gregory A. Lang

As Hennepin residents begin to plan the process of transitioning their assets to their heirs or beneficiaries, concerns may arise over how those assets will be handled once they are distributed. The hope is that beneficiaries will have the skills necessary to manage their bequeathed assets wisely. However, that is not always the case. Fortunately, trust grantors can maintain some control over how a beneficiary’s interest in a trust is used through a spendthrift clause.

In a broad sense, a spendthrift trust protects a beneficiary from using the assets given to him or her through the trust unwisely. In many cases, such beneficiaries may already have significant debts even before receiving assets through a trust. A spendthrift trust also provides protection against a beneficiary’s trust interest from immediately being forfeited to a creditor.

According to Minnesota State Bar Association, a spendthrift clause prevents a beneficiary from both voluntarily and involuntarily assigning ownership of trust assets to creditors. This means that even if a creditor has a judgment against a beneficiary, any assets the beneficiary receives will not automatically be exhausted to satisfy it.

The protection afforded through a spendthrift trust also extends to bankruptcy. Section 541 (c)(2) of the U.S. Bankruptcy Code as shared by the Legal Information Institute of the Cornell Law School states that any beneficial interest from a spendthrift trust is exempt from being included in a bankruptcy case. Even in cases where a beneficiary is already going through bankruptcy and his or her trust interest may have not been protected by a spendthrift clause, the grantor may still amend the trust to include one. However, this benefit is usually only extended if the funds from the trusts were not available to the beneficiary at the time he or she filed. 

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