A “spendthrift trust” provides a fund for the benefit of another, secures it against the beneficiary’s improvidence, and places it beyond the reach of the beneficiary’s creditors. A spendthrift trust has long been recognized as a useful vehicle for providing the beneficiary with the benefits of the trust while simultaneously preventing the beneficiary from voluntarily transferring his interest in the trust. This is particularly useful where the settlor wants to protect the transfer of wealth to a beneficiary. For instance, if a parent makes a large gift to an irresponsible child, the child will likely squander the gift in the short term. Further, if a classic trust is set up for the irresponsible child, he may freely alienate his interest in future payments of the trust and essentially achieve the same short-term gain at the cost of a long-term promise. However, a spendthrift trust solves these potential problems by allowing the parent to gift to the child while simultaneously protecting the payments from immediate alienation by the child through a spendthrift clause. The clause prohibits the beneficiary of the trust from voluntarily or involuntarily transferring her interest in the trust.
“Self-settled spendthrift trusts” are a sub-class of spendthrift trusts. Offering similar protection to the assets placed within the trust as a spendthrift trust, a self-settled spendthrift trust is created by the beneficiary of the trust. Self-settled spendthrift trusts are a popular tool for protecting one’s assets from creditors. Specifically, the creator of the self-settled trust will protect the assets transferred from voluntary or involuntary alienation while simultaneously retaining the benefits of the assets for himself. However, most states do not recognize the validity of self-settled trusts because of numerous public policy concerns. The basic belief is that a debtor may not protect or hide his assets away from legitimate creditors by placing the assets in a self-settled spendthrift trust.