Using a Spendthrift Trust to Provide Asset Protection for Beneficiaries in Texas

One of the most important components of an effective estate plan is its asset protection features. When properly constructed, an estate plan can shield assets from your creditors as well as those of your beneficiaries. While many people postpone estate planning decisions, it is important to understand that the asset protection features of an estate plan must be implemented before the specter or a creditor claim or judgment is on the horizon to avoid claims of fraud.

A trust arrangement allows you as the Settlor to transfer assets into a trust that is managed by a Trustee for the benefit of the beneficiaries of the trust. While a trust can be either revocable or irrevocable and the same person can be both the Trustee and Beneficiary of the trust, there are limitations to such arrangements if the trust is going to provide asset protection.

The trust must be both irrevocable and you cannot be the beneficiary of the trust if you want the trust to provide protection from creditor claims. This type of trust is often called a “spendthrift trust.” This type of trust can be used to provide for the financial maintenance of another person while shielding the assets in the trust from the creditors of the beneficiary. This form of trust often is used to protect beneficiaries who may have difficulty managing their own financial affairs.

By way of example, the spendthrift trust might be set up with $500,000 in the trust with a limit of $25,000 per year in annual disbursements to protect a beneficiary who has a drug problem or gambling addiction. Any terms that are used to prevent a direct transfer of the trust assets to the beneficiary may be used to establish a spendthrift trust. While creditors can seek to have distributions made from the trust paid toward their claims, they cannot obtain a right to future payments from the trust nor the principal or assets within the trust.

This prevents the beneficiary from selling the trust assets to satisfy creditor claims. Although the creditor can still seek to enforce a judgment or other financial obligation against funds already disbursed, this spendthrift restriction prevents the entire principal in the trust from being pledged or the direct encumberance of future payments as they become due to the beneficiary. The protection of the principle increases the probability that the beneficiary will continue to have an ongoing stream of income for his or her care and support.

At our Arlington estate planning law firm, Thomas D. Reino carefully evaluates your estate to create an estate plan that is appropriate for your specific situation. If you have questions or need estate planning documents prepared, we invite you to contact us at 817.303.2133 or send us an email at so that you can set up an initial consultation.


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