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THE “SELF-SETTLED” SPENDTHRIFT
TRUST
The
law in most states provides that the creditors of a
grantor (the person who contributes assets to a trust)
who establishes a trust for his/her own benefit (a
“self-settled” trust) can attach the grantor's assets
transferred in trust if the trustee has the authority to
distribute property back to the grantor. However, these
assets are protected from the creditors of other
beneficiaries of the trust provided these beneficiaries
did not become grantors of the trust by contributing
assets to it (the creditor protection feature of
non-grantor beneficiaries is what makes a trust a
“spendthrift trust”). This means that if the grantor of
a trust is also a beneficiary, the grantor's creditors
can reach his/her beneficial interest in the trust in
satisfaction of the grantor's debts and obligations.
Most states do not recognize the validity of the
so-called “self-settled spendthrift” trust (a trust that
provides creditor protection to a grantor of a trust who
is also a beneficiary of that trust). This is one of the
reasons why assets in a typical living trust are not
protected from creditors while the grantor is alive.
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