A spendthrift clause is one of the most important provisions you can include in your trust to protect beneficiaries from losing their inheritance. This legal provision helps keep trust assets safe from creditors and poor financial decisions.
Without this protection, the assets you’ve worked hard to accumulate and preserve could be quickly diminished or lost entirely after your passing. Beneficiaries face numerous financial risks—from creditor claims to bankruptcy proceedings to divorce settlements—that can threaten their inheritance.
A spendthrift clause directly addresses these risks.
When included in your trust, this powerful provision protects your legacy and ensures your hard-earned assets benefit your loved ones as you intended—not their creditors.
A spendthrift clause is a specific provision in a trust document that protects the beneficiary’s interest from creditors and prevents the beneficiary from transferring their interest in the trust.
In North Carolina, the Uniform Trust Code §36C-5-502 specifically addresses spendthrift provisions, stating:
“A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary’s interest.”
Simply put, this clause creates two important barriers:
The language can be as simple as stating the interest is “subject to a spendthrift trust” in the trust document. This straightforward phrasing is sufficient under North Carolina law to establish full protection.
When properly structured, a spendthrift clause provides multiple layers of protection:
Creditors cannot force the trustee to make distributions to satisfy a beneficiary’s debts. They can only attempt to collect after money has been distributed to the beneficiary.
The clause prevents beneficiaries from pledging their future trust distributions as collateral for loans or selling their interest at a discount to receive immediate cash.
Trust assets remain separate from bankruptcy proceedings, and in many cases, can be structured to provide additional protection during divorce settlements.
With a properly structured trust, the trustee maintains control over distributions, helping protect beneficiaries who might otherwise quickly deplete their inheritance.
Consider adding this provision if any of your beneficiaries:
While powerful, spendthrift clauses do have limitations under North Carolina law:
According to §36C-5-503, a spendthrift provision cannot prevent a beneficiary’s child who has a judgment for support from obtaining a court order attaching present or future distributions.
Once assets leave the trust and reach the beneficiary, the protection ends. Creditors can then pursue those distributed funds.
You cannot create a trust with a spendthrift provision to protect yourself from your own creditors. The protection applies only to the beneficiaries, not to the person who creates the trust.
Creating an effective trust with a spendthrift provision requires attention to detail and proper legal drafting. Here’s what you need to know:
The North Carolina Uniform Trust Code requires specific language that restrains both voluntary and involuntary transfers. Using established legal terminology is critical to ensure the provision will be enforced.
For maximum protection, many trusts combine spendthrift clauses with discretionary distribution provisions, giving the trustee authority to decide when and how much to distribute to beneficiaries.
Since the trustee holds significant responsibility in managing and distributing trust assets, selecting the right trustee is crucial for long-term success.
No. While common in many trusts, spendthrift provisions must be specifically included in the trust document.
Possibly, but it depends on whether the trust allows for amendments. Irrevocable trusts generally cannot be modified without court approval or specific circumstances.
No. There are exceptions, particularly for child support obligations and certain government claims.
The trustee must be careful to make distributions directly to providers of services rather than to the beneficiary in some cases, to maintain protection.
Estate planning goes beyond simply passing assets to the next generation—it’s about protecting your legacy and ensuring your loved ones benefit from your hard work.
A properly drafted trust with a spendthrift clause provides that protection, giving you peace of mind that your wishes will be carried out regardless of what challenges your beneficiaries might face in the future.
At Johnson Legal, we understand the importance of building robust, personalized estate plans that protect what matters most to you. Our approach focuses on understanding your family dynamics and creating solutions that address your specific concerns.
To learn more about how a spendthrift clause can protect your legacy, contact Johnson Legal or visit our office in Wilmington.
This article provides general information and should not be considered legal advice for your specific situation.
Shane T. Johnson is the CEO and Managing Partner of Johnson Legal, an estate planning and business law firm in Wilmington, NC. With years of experience in estate and business law, he has zealously represented clients in various legal matters, including small business formation and purchasing, estate planning, probate, domestic violence, and other legal cases.
Shane received his Juris Doctor from the University of Wyoming and is a member of the North Carolina Bar Association. He has received numerous accolades for her work, including being named among the Best Probate Lawyers in Wilmington by Expertise.com.
