Should a Spendthrift Clause be Included in a Special Needs Trust?
A spendthrift clause “restrains both voluntary and involuntary transfer of a beneficiary’s interest.”[1] Simply put, a spendthrift clause protects the assets of a trust from both creditors and the beneficiaries of the trust. This can be especially useful for a disabled or aged individuals, who might be vulnerable to manipulative relatives, predatory creditors, or conmen.
Spendthrift clauses are permitted but generally not required in special needs trusts.[2] However, without a spendthrift clause, creditors may be able to access any mandatory distributions made from the trust.[3] Additionally, if any trust with mandatory distributions lacks a spendthrift provision, then the applicant may be able to sell the right to future payments for a lump sum. And any interest in the trust that the applicant can sell is counted as a resource. Thus, the present value of mandatory future payments is potentially a countable resource if the trust lacks a spendthrift clause.[4] Therefore, a spendthrift clause may be necessary for any special needs trust that requires mandatory distributions.[5]
However, spendthrift provisions are not effective in first-party special needs trusts. Florida courts generally will not enforce a spendthrift clause in any self-settled trust “designed to permit a person to place his or her assets beyond the arms of creditors.[6] Thus, as a first-party special needs trust is a self-settled trust, a spendthrift clause will generally not keep creditors from being able to attach an interest to distributions from the trust. Indeed, the Florida Statutes specifically contemplate the existence of a valid security interest attaching to a first-party special needs trust.[7]
Additionally, if the self-settled trust is irrevocable—as any first-party special needs trust should be—any creditor of the settlor may reach “the maximum amount that can be distributed to or for the settlor's benefit.”[8] The same principle holds true for discretionary trusts, with creditors allowed to reach “the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.”[9] Therefore, a creditor could reach any amount which the trustee could apply for the benefit of the beneficiary, despite the trust containing a spendthrift clause and being discretionary. And because these special needs trusts must follow the sole benefit rule, a creditor could gain access to the entire amount in trust, with the exception of any assets specifically exempted from creditors, such as a homestead.
Therefore, spendthrift clauses are generally advisable for third-party special needs trusts but should not be relied upon in first-party special needs trusts.
[2] SSA POMS SI 01120.200.B.13.
[4] SSA POMS SI 01120.200.D.1.a.
[5] SSA POMS SI 01120.200.B.13.
[6] In re Rensin, 600 B.R. 870, 880 (Bankr. S.D. Fla. 2019); but see In re Wheat, 149 B.R. 1003, 1005 (Bankr.S.D.Fla.1992) (“[T]he stated policy against self-settled spendthrift trusts is not as compelling in situations where, as here, the settlor-beneficiary's control is relatively limited”).
[7] Fla. Stat. § 679.4061(8)(b); Fla. Stat. § 679.4081(6)(b).
[8] Fla. Stat. § 736.0505(1)(b); see also Dexia Credit Local v. Rogan, 624 F.Supp.2d 970, 979 (N.D. Ill. 2009) (citing Fla. Stat. § 736.0505) (applying § 736.0505(1)(b) to a self-settled trust).
[9] In re Lawrence, 251 B.R. 630, 642 (S.D.Fla.2000) (quoting In re Cameron, 223 B.R. 20, 25 (Bankr.S.D.Fla.1998)).