Spendthrift provision

How it works

A spendthrift provision places a transfer restriction on a beneficiary's trust interest. Colorado and Tennessee define the provision as restraining both voluntary and involuntary transfers. Missouri recognizes a provision that restrains either kind of transfer, or both.

West Virginia requires language that substantially restrains both kinds of transfer for the provision to be valid. Under West Virginia law, creditors or assignees generally cannot reach the interest or a distribution before the beneficiary receives it, subject to exceptions described in that law.

Where it shows up for owners of businesses, real estate and private investments

A spendthrift provision concerns a beneficiary's interest in a trust. An owner who places business, real estate or investment interests in a trust may encounter the term when the trust describes how a beneficiary's interest can be transferred.

The definition does not itself describe the treatment of a particular business, property or investment. The state definitions address the beneficiary's interest, and the transfer restrictions vary by state.

Points that are easy to confuse

A transfer restriction on a beneficiary's interest is distinct from a rule about every trust asset or every distribution. West Virginia's rule addresses reach before a distribution is received and states that exceptions apply.

State definitions do not use identical standards. Colorado and Tennessee specify restraints on both voluntary and involuntary transfer, while Missouri's definition permits restraint of either or both.

Common questions