An irrevocable spendthrift trust places one person's assets in the hands of another for the benefit of a third party. This trust, once created, cannot be changed, and prevents the third party from selling or otherwise transferring his interest in the trust, either voluntarily or involuntarily. Those contemplating creation of a trust should seek the advice of an attorney.
A trust is a legal structure in which a property owner (the "settlor") gives property to a second individual (the "trustee"), who caretakes and invests the property for the benefit of a third party (the "beneficiary"). The trustee holds legal title to the trust assets, but the beneficiary holds equitable, meaning beneficial, title to those assets. The trustee has a fiduciary duty to manage the assets to the best of his ability, and cannot in any way appropriate the assets for his own use.
An irrevocable trust is one that, once created, cannot be changed. The term "irrevocable" is misleading; often an irrevocable trust can be changed if the settlor, trustee and any beneficiaries all give their consent. However, once the settlor dies without attempting to revoke the trust, the trust becomes truly irrevocable.
A spendthrift trust, also known as an asset protection trust, is one that doesn't allow the beneficiary to transfer his interest in the trust, either voluntarily or involuntarily. This trust arrangement not only protects the beneficiary from his own poor financial management, but also protects him from any creditors who may seek to reach the trust assets. Most jurisdictions require that the trust instrument contain an express spendthrift provision to create a spendthrift trust.
Restraint on Alienation
In an ordinary trust, the beneficiary is able to freely alienate (transfer) his interest, either by selling the interest or to satisfy some sort of legal judgment. However, the spendthrift trust does not allow alienation. Courts often refuse to uphold restraints on alienation, but most courts will uphold a spendthrift trust. Other parties cannot reach the beneficiary's interest until the trustee has distributed a portion of it to the beneficiary. In the case of creditors, courts will often only allow the beneficiary the amount needed to maintain his standard of living, and then may allow creditors to take the rest.
Some settlors will attempt to create a self-settled spendthrift trust, in which the settlor is also the beneficiary. However, many states have rejected self-settled spendthrift trusts as a blatant attempt by the settlor to retain the benefits of his property while shielding the property from creditors. Only six states allow these types of trusts. Courts in other states will look carefully at precisely who provided the assets that go into the trust, to make sure that the settlor does not attempt to circumvent the law by having someone else put his assets in trust for his own benefit.