What is a Spendthrift Clause, and When Do People Use It?

Episode 319 – Life doesn’t necessarily get easier when you accumulate wealth. There’s always something to worry about, and at some point, if you’re lucky, your worries evolve from accumulating your wealth to protecting it. If you’re worried about future generations destroying the wealth you’ve worked to accumulate, a spendthrift clause could help ease your mind.

More SML Planning Minute Podcast Episodes





Transcript of Podcast Episode 319

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, what is a spendthrift clause, and when do people use it?

As people grow older and become (hopefully) wealthier, life doesn’t always get easier. There’s always something to worry about, and at some point, if you’re lucky, your worries evolve from accumulating your wealth to protecting it.

We’ve all seen cases—MC Hammer, Lindsay Lohan, Lisa Marie Presley and even her one-time husband Michael Jackson—who seem to have more money that they could ever use, until they find a way to waste it. If you’re worried about future generations destroying the wealth you’ve worked to accumulate, perhaps you should consider a spendthrift clause.

A spendthrift clause is usually just a provision within some sort of trust, say a family or life insurance trust. The basic idea is that you can put a trustee between yourself and any beneficiary who might be inclined to waste money on things you would consider useless or ill-advised.[1]

So, how does a spendthrift clause work? It permanently designates that the trust itself is the sole owner of the assets that it holds. The beneficiary does not get control over the assets themselves, at least initially. The trust will generally allow assets to be released to the beneficiary over time according to a set schedule or based upon need or purpose, determined by the grantor, who is the person who initially sets up the trust. This is a way for the grantor to help protect their assets from irresponsible spending after they’re gone, while still providing their beneficiaries with resources to help them meet their expenses.

When would such a clause be used? Maybe when the beneficiary is suffering from substance abuse or alcohol addiction, tends to make impulsive spending choices or is in heavy debt. It can also apply to individuals who live beyond their means or have little control over spending habits. It can also be useful with respect to a beneficiary with functional needs who may be eligible for SSI or Medicaid.[2]

Also, depending on state law, a spendthrift clause may help when the beneficiary is at risk of bankruptcy or getting a divorce.[3]

Here’s a simple example. Assume you want to leave $500,000 to your child, but for whatever reason, you’re worried that the money won’t be handled the way it should. If you use a trust with a spendthrift provision, you’re still leaving the money to your child. You’re just trying to make sure it lasts as long as it should. So, you might decide that the money will go to your child at a rate of $10,000 per month. You can also decide whether you’d like your child to have access to extra funds in an emergency and, if so, how that would work. You’ll have an independent trustee to oversee the process.

It is critical that you find the right person to be the trustee. Remember that the trustee may have discretion when distributing the funds, so it needs to be someone you can trust over the long term. A financially savvy friend or family member might make sense, and that person might be willing to perform the job for little or no fee. But also, such an individual could be influenced by other factors such as personal relationships, which may affect their decisions in a negative way.[4]

Another possibility is a private fiduciary, often a third-party professional with a specific background in the role of a trustee. An independent trust company is another possibility, although this may result in additional costs.[5]

Keep in mind that the availability of spendthrift clauses varies by state. Not every state recognizes them. And the ones that do may have different rules on the types of exceptions that are allowed, particularly when it comes to the rights of creditors.[6]

As always, you need an estate planning attorney to help you figure all this out, and to put together the legal documents for you.

[1] Salinger, Tobias. “Funny name, serious implications: The basics of spendthrift clauses.” financial-planning.com. https://www.financial-planning.com/news/estate-planning-basics-of-spendthrift-clauses?position=1&campaignname=NL_FP_Daybreak_10302024&oly_enc_id=8797D9329467F2S (accessed Jan. 16, 2025).

[2] Pescow, Roberta. “Spendthrift Trust: What Is It and How Does It Work?” nerdwallet.com. https://www.nerdwallet.com/article/investing/estate-planning/spendthrift-trust (accessed Jan. 17, 2025).

[3] Pescow, Roberta. “Spendthrift Trust: What Is It and How Does It Work?” nerdwallet.com. https://www.nerdwallet.com/article/investing/estate-planning/spendthrift-trust (accessed Jan. 16, 2025).

[4] McClain, Denise. “Choosing Your Trustee: These Are the Common Options.” Kiplinger.com. https://www.kiplinger.com/retirement/choosing-your-trustee-common-options (accessed Jan. 16, 2025).

[5] Pescow, Roberta. “Spendthrift Trust: What Is It and How Does It Work?” nerdwallet.com. https://www.nerdwallet.com/article/investing/estate-planning/spendthrift-trust (accessed Jan. 16, 2025).

[6] Cornell Law School, Legal Information Institute. “Spendthrift Clause.” Law.cornell.edu. https://www.law.cornell.edu/wex/spendthrift_clause (accessed Jan. 16, 2025).

More SML Planning Minute Podcast Episodes

This podcast is brought to you by Security Mutual Life Insurance Company of New York, The Company That Cares^®.  The content provided is intended for educational and informational purposes only.  Information is provided in good faith.  However, the company makes no representation or warranty of any kind regarding the accuracy, reliability, or completeness of the information. 

The information presented is designed to provide general information regarding the subject matter covered.  It is not to serve at legal, tax or other financial advice related to individual situations, because each person’s legal, tax and financial situation is different. Specific advice needs to be tailored to your situation. Therefore, please consult with your own attorney, tax professional and/or other advisors regarding your specific situation

To help reach your goals, you need a skilled professional by your side.  Contact your local Security Mutual life insurance advisor today.  As part of the planning process, he or she will coordinate with your other advisors as needed to help you achieve your financial goals and objectives.  For more information, visit us at SMLNY.com/SMLPodcast.  If you’ve enjoyed this podcast, tell your friends about it.  And be sure to give us a five-star review.  And check us out on LinkedIn, YouTube and X (formally Twitter).  Thanks for listening, and we’ll talk to you next time.

Tax laws are complex and subject to change. The information presented is based on current interpretation of the laws. Neither Security Mutual nor its agents are permitted to provide tax or legal advice.

The applicability of any strategy discussed is dependent upon the particular facts and circumstances.  Results may vary, and products and services discussed may not appropriate for all situations.  Each person’s needs, objectives and financial circumstances are different, and must be reviewed and analyzed independently.  We encourage individuals to seek personalized advice from a qualified Security Mutual life insurance advisor regarding their personal needs, objectives, and financial circumstances.  Insurance products are issued by Security Mutual Life Insurance Company of New York, Binghamton, New York.  Product availability and features may vary by state. 

SubscribeApple PodcastsSpotifyAndroidPandoraBlubrryby EmailTuneInDeezerRSSMore Subscribe Options