Spendthrift provision

Also called: Spendthrift trust.

Where the statute uses it: Minn. Stat. § 501C.0502

What it means

Both is the operative word. A clause restricting only what a beneficiary may give away, or only what a creditor may seize, is not a spendthrift provision under § 501C.0103(p). It has to restrict both directions.

Creating one is easy. Paragraph (b) of § 501C.0502 accepts the shorthand: a term providing that a beneficiary’s interest is held subject to a “spendthrift trust,” or words of similar import, restricts both kinds of transfer. Paragraph (d) states the protection and its edge in one sentence.

A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.

The words “before its receipt by the beneficiary” attach to the distribution, not to the interest. Read paragraph (d) by itself and the protection looks flat. Sections 501C.0504 to 501C.0506 are where it acquires its shape, and each of the three applies whether or not the trust contains a spendthrift provision.

Where the word shows up

In one paragraph of the trust instrument, often boilerplate, often the paragraph nobody reads. In § 501C.0411(c), which says a court is not precluded from modifying or terminating a trust because the instrument contains spendthrift provisions.

Trust sellers describe the clause as putting a beneficiary’s inheritance permanently out of a creditor’s reach. Three limits say otherwise. Section 501C.0502(d) says nothing about money already in the beneficiary’s hands. Section 501C.0506(b) lets a creditor reach a mandatory distribution the trustee has not made within a reasonable time after the designated distribution date. Section 501C.0505 lets a creditor reach a revocable trust’s property during the settlor’s life, and reach the maximum that can be distributed to or for the settlor’s benefit from an irrevocable one.

One limit runs the other way. Under § 501C.0504(a) a creditor of a beneficiary may not compel a distribution subject to the trustee’s discretion, even where the trustee has abused that discretion.