Trusts may be used to allow a donor to transfer assets for the benefit of a beneficiary, while at the same time shielding such assets from the reach of creditors. The laws of most states permit the creation of so-called spendthrift trusts. For the most part, these laws prevent the beneficiary from assigning any interest in the income or principal of the trust, thus thwarting attempts by creditors to gain access to such property.
The protection against creditors usually varies with the level of discretion given the trustee. Where the beneficiary is not entitled to income or principal, unless the trustee sees fit to pay amounts to the beneficiary, the trust barrier can be considerable.
The creditor protection provided by spendthrift trusts is not absolute. Most states limit the creditor protection. People providing necessities for the health, education, and welfare of the beneficiaries can usually reach the assets of spendthrift trusts. Additionally, many state laws permit the assets of the trust to be reached to provide for child support of the beneficiary. Also, it has been held that, as a matter of federal law, spendthrift clauses cannot be effective against a federal tax lien.
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