A spendthrift trust is a legal and financial device essentially invented to protect the livelihood of the widows and idiot children of wealthy people. In a spendthrift trust, a donor sets aside money or property to be invested and administered for the support of one or more beneficiaries. The assets and income of the trust generally cannot be attached or seized to satisfy the debts of the beneficiaries.
The reason this is called a "spendthrift" trust is because it prevents the beneficiary from spending the fortune on baccarat, cocaine, Ferraris, Playmates of the Year or the Home Shopping Network. It also allows the beneficiary to declare bankruptcy in the event they run up a great deal of debt, in which case the spendthrift trust will survive the bankruptcy without being divvied up by the creditors.
Since unrestricted spendthrift trusts could easily be used for all sorts of fraud, most states impose limitations on their use. For example:
- A person cannot donate property to a spendthrift trust for their own benefit. (That would be way too easy.)
- Income in excess of what the beneficiaries need for maintenance and education is usually not protected from creditors. If these necessities are being covered by another source (work income, gifts or an allowance), then creditors may be able to claim against the equivalent amount of trust income.
- Alimony, child support and tax obligations may be claimed against the income of the trust regardless of its amount.
- Many states also provide that a certain portion of the income of any spendthrift trust (eg. ten percent or a particular monetary amount) is seizable by creditors for any reason.