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The usefulness of a spendthrift trust

On Behalf of | Sep 18, 2017 | Estate Planning |

A spendthrift trust in Illinois is a tool to protect heirs from themselves. A person with substantial assets may naturally want to give the fortune to heirs. However, knowing the heirs’ propensity to overspend whatever they have, the settlor may want them to not have access to the bulk of the assets. They cannot spend what they do not have.

Rather, the settlor may choose to give them an allowance each year via a spendthrift trust. This kind of trust can also protect heirs, as beneficiaries, from the creditors they may accumulate, in addition to their own tendency to outright overspend.

Trust can preserve assets

As its name suggests, a spendthrift trust is a trust where the maker or settlor of the trust provides that the beneficiary may not spend trust moneys before he or she receives distributions from the trustee. The chosen trustee who cares for the trust assets and invests them for creating income, determines what payments are payable to the beneficiary under the trust. The trustee must abide by any trustee provisions in that regard.

The principal in the trust is also unavailable to the beneficiaries’ creditors, should the beneficiaries become unable to pay their bills and debts. The creditors may only gain rights to the distributions paid out to the beneficiary. This kind of trust is like other trusts except that it must contain a spendthrift provision.

Trust will not protect from settlor’s creditors

One may wonder why a person would not create his or her own spendthrift trust and become the settlor of the trust, the trustee and the beneficiary. That settlor could then, arguably, protect his assets from creditors he owes money to forever, while collecting the income generated by those assets for himself. Public policy and common law largely prevents this in many states, including Illinois.

In the case of Rush University Medical Center v. Sessions, the power of the common law rule that a self-settled spendthrift trust was void as to current and future creditors was under fire. The trustees, seeking to protect the trust assets from the settlor’s creditor, argued that Illinois’ Uniform Fraudulent Transfer Act nullified the common law in this instance. However, the Supreme Court disagreed. The lack of a finding of a fraudulent conveyance into the trust under the UFTA did not then prevent the effect of the common law which would void the self-settled spendthrift trust as to the settlor’s creditor. Thus, the self-settled spendthrift trust could not avoid the settlor’s creditor from going after the spendthrift trust’s assets.