When a trust includes a valid spendthrift provision
, a beneficiary may not transfer his interest in the trust and a creditor or assignee of the beneficiary may not reach any interest or distribution from the trust until the beneficiary receives the interest.
A spendthrift provision
is a provision in a trust agreement that states that the beneficiary cannot sell, pledge or encumber his beneficial interest, and that a creditor cannot attach a beneficiary's interest.
Historically, Illinois courts have treated a spendthrift provision
as a material purpose of the trust that prohibits termination.
A traditional trust might also have a spendthrift provision
to protect trust assets from a beneficiary's creditors.
one universally accepted exception to the spendthrift trust doctrine: state courts and federal bankruptcy courts will not enforce a spendthrift provision
in a self-settled trust.
If a plan is governed by the Employee Retirement Income Security Act (ERISA), then the act's spendthrift provision
exempts benefits from creditors.
0503(2): "To the extent provided in subsection (3), a spendthrift provision
is unenforceable against: (a) A beneficiary's child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance.
26) For this reason, each court most likely misconstrued the question before it as one of validity under section 270, rather than administration and efficacy of the spendthrift provision
under section 27'3.
19) There was a concern that bankruptcy courts were permitting creditors to attach single owner/participant plans on the theory that the plan, that was required to have a spendthrift provision
, was a self-settled trust which, then and now, does not defeat claims of the settlor's creditors.
53) Once the creditor learns that the beneficiary's interest in trust is restricted by a spendthrift provision
he can either bargain for increased protection or simply choose not to deal with the beneficiary.
As long as the trust does not contain a valid spendthrift provision
, a court may "authorize a creditor or assignee of the beneficiary to reach the beneficiary's interest by attachment of present or future distributions to or for the benefit of the beneficiary or by other means.
The Court reasoned that the ERISA spendthrift provision
was a "restriction on transfer enforceable under applicable nonbankruptcy law.