Spendthrift trusts: Protecting inheritances from overspending & creditors

A spendthrift trust can be a thoughtful way to support your heirs while helping protect inherited assets from risks such as overspending, creditor claims or lawsuits.

In this article, we’ll walk through what a spendthrift trust is, how it works, key benefits and trade-offs, and when it may make sense as part of your estate plan.

A spendthrift trust is a type of trust specifically designed to help protect a beneficiary’s inheritance from misuse or exposure to creditor claims. In plain terms, it allows a person (the grantor) to leave money or property for someone else’s benefit, but with legal limits on how that person can access or control it. The key goal is to support beneficiaries—particularly those who are young or still developing financial experience—by helping ensure the inheritance is used wisely and remains protected from creditor claims.

The central feature of this arrangement is the spendthrift clause, a legal provision built into the trust document. This clause restricts the beneficiary’s ability to sell, pledge or transfer their interest in the trust to anyone else. As a result, creditors generally cannot reach the trust assets to satisfy debts, and the beneficiary cannot borrow against their future distributions.

Control of the assets rests with the trustee, who manages investments and decides when and how much to distribute to the beneficiary, following the grantor’s instructions. This ensures a measured and responsible flow of funds rather than a lump-sum payout.

Spendthrift trusts are recognized in most U.S. states, but protection levels and legal requirements vary by jurisdiction, making professional guidance essential. Some states impose limits on how much protection a spendthrift clause can provide, especially when the grantor and beneficiary are the same person. Because of these nuances, families often consult estate planning attorneys to tailor the trust to their specific goals and state laws.

A spendthrift trust serves several important purposes in protecting both the beneficiary and the assets left behind by the grantor. Its design helps ensure wealth is used thoughtfully and safeguarded from unexpected financial challenges or outside claims.

Key purposes include:

• Supports healthy money management. Helps beneficiaries, including those who are young or still developing financial experience, receive their inheritance over time rather than all at once.
• Shields assets from creditors and lawsuits. Because the trust (not the beneficiary) owns the assets, creditors generally cannot seize them to satisfy debts or judgments.
• Provides protection in divorce. In many cases, assets held in a properly structured spendthrift trust are not considered marital property and are therefore insulated from divorce settlements.
• Ensures long-term financial support. The trustee controls the timing and purpose of distributions, allowing funds to support needs such as education, housing or health care over many years.
  

By accomplishing these goals, a spendthrift trust can align with broader estate planning priorities—preserving family wealth, encouraging sound financial habits across generations, and offering reassurance that loved ones will benefit from the assets in a measured, sustainable way.

Here's a simple guide to how a spendthrift trust works:

1. The grantor creates the trust and adds a spendthrift clause. The grantor (also called the settlor) signs a trust agreement that names the beneficiary, appoints a trustee and includes a spendthrift clause. The language limits the beneficiary’s ability to sell, pledge, assign or otherwise transfer their interest before money is actually distributed.

2. The trustee manages and distributes assets under a fiduciary duty. The trustee invests the trust property, keeps records and follows the grantor’s instructions on when and why to distribute funds, often under standards like "health, education, maintenance and support." The trustee can exercise discretion to pause or tailor distributions if circumstances warrant.

3. The beneficiary receives funds only as directed. Beneficiaries do not control the trust assets. They receive distributions on the schedule and for the purposes set by the trust. Often this takes the form of regular installments (e.g., monthly or quarterly), milestone payments or direct payments to schools, landlords or medical providers.

This structure matters because the spendthrift clause blocks beneficiaries from demanding early access or assigning their interest to others. It also generally prevents most creditors from reaching trust assets before distribution.

Here's an example of how a spendthrift trust works: Instead of a lump sum at age 21, a trust might pay $2,500 per month for living expenses and cover tuition directly to the school. This steady, needs-based approach supports the beneficiary over time and preserves principal.

A spendthrift trust differs from other trust structures primarily in how it restricts a beneficiary’s access to funds:

In a discretionary trust, the trustee has full discretion over whether and when to make distributions, offering strong protection because beneficiaries have no enforceable right to demand payments. A spendthrift trust, in contrast, may provide scheduled or conditional distributions, and the spendthrift clause prevents beneficiaries from assigning or pledging their interest. It also helps keep creditors from accessing trust assets before they are distributed.

Compared with a standard irrevocable trust, a spendthrift trust gives beneficiaries less direct control and therefore greater asset protection. In many irrevocable trusts, the beneficiary’s vested interest could be reached by creditors or considered in divorce proceedings. Adding a spendthrift clause, even to an irrevocable or discretionary trust, enhances protection by explicitly limiting both voluntary and involuntary transfers of the beneficiary’s interest, strengthening the shield around inherited wealth.

1. Protects assets from creditors and potential overspending.
The spendthrift clause helps ensure an inheritance isn’t depleted through harmful spending behaviors or lost to lawsuits, creditors, or other financial risks.

2. Ensures long-term financial stability. 
Distributions are structured to provide sustained support, helping beneficiaries meet ongoing needs like education, housing and health care.

3. Provides reassurance for the grantor. 
The structure reassures the grantor that their wealth will be used as intended and protected for future generations.

1. Limits beneficiary control. 
Beneficiaries cannot freely access or manage the trust assets, which can cause frustration or conflict with the trustee.

2. Requires careful trustee management and potential fees.
Trustees must act responsibly, which can involve professional management costs and ongoing administrative oversight.

3. Protection varies by state law. 
Some states impose limits on how strongly a spendthrift clause can shield trust assets, especially when the grantor and beneficiary are the same person.

A spendthrift trust is worth considering when you want to protect beneficiaries from financial risk or outside claims. It can be especially valuable in situations such as:

• Poor money management. If a beneficiary has a history of overspending, gambling or other financial difficulties, a spendthrift trust ensures their inheritance is distributed responsibly over time.
• Creditor or divorce concerns. Families who worry about creditors, lawsuits or potential divorce settlements can use this structure to keep assets legally separate and protected.
• Young or inexperienced beneficiaries. For children, grandchildren or young adults who lack financial experience, a trustee can manage funds until they mature or meet certain milestones.
• Grantor control and legacy goals. When the grantor wants to guide how and when funds are used, such as for education, health care or long-term support, a spendthrift trust provides both structure and reassurance that assets will serve their intended purpose.

A spendthrift trust—built on the protection of a strong spendthrift clause—can provide a thoughtful balance between supporting loved ones and safeguarding assets. If you’re wondering whether a spendthrift trust fits your estate plan, consult a Thrivent financial advisor for guidance on wealth transfer, asset protection and legacy planning.

You can also get started by exploring Thrivent's estate planning and trust services.