What rights do creditors have to a beneficiary’s interest in an irrevocable trust? There are a number of misconceptions related to this common question, and further, the law varies from state-to-state. However, there are some generally applicable concepts to consider in determining whether a creditor can access the rights of a beneficiary to an irrevocable trust.
As an initial matter, the law is reasonably clear that a trust which restrains the right of a beneficiary to voluntarily or involuntarily transfer their interest in an irrevocable trust or to appoint trust assets to their creditors, commonly referred to a spendthrift provision, then the trust is not subject to claims of the beneficiary’s creditors.[1] It is important, in order to provide this protection for beneficiaries, that the trust contain such a spendthrift provision.[2] As such, trusts with spendthrift provisions (which do not necessarily have to contain any exact language, but rather indicate the settlor’s intention of establishing a spendthrift trust), protect trust assets from a beneficiary’s creditors.
However, it is not always that straightforward. There are several exceptions. Further, the beneficiary’s interest is only protected until “its receipt by the beneficiary”[3] or “until paid to the beneficiary.”[4] A significant exception is that spendthrift trust protections generally do not apply to the extent of a settlor’s right to distributions from the trust.[5] It is important to understand that there are circumstances where the beneficiary, other than the nominal settlor of a trust, will be deemed to be the settlor for these purposes.[6] Also, some states have public policy exceptions for certain creditors such as claims for child support, marital claims, or claims of the government.[7]
This writing is not intended to focus on these exceptions, but rather the rights of creditors to beneficiaries falling outside the exception circumstances. As such, the remainder of this writing will discuss the rights of non-exception creditors to the interests of beneficiaries who are provided spendthrift protections under relevant law.
Spendthrift Protection, Generally
United States trust law generally is derived from the English common law of trusts which does not provide spendthrift protection. The U.S. Supreme Court deviated from English common law of spendthrift trusts by allowing spendthrift protections in the United States.[8] In that opinion, Justice Miller asserted that spendthrift trusts are valid in the United States and stated that “Why a parent … who … wishes to use his own property in securing [his child] … from the ills of life, the vicissitudes of fortune, and even his own improvidence, or incapacity for self-protection, should not be permitted to do so, is not readily perceived.” The notion was that the owner of property should be entitled to do what they like with their own assets, including placing restraints on the use of such assets gifted for another. This is the case even notwithstanding its effect on the rights of third parties or the broader public.
Although the United States had adopted the notion that spendthrift trusts were permissible, that was put to the test in a Mississippi case involving facts sympathetic to the creditor.[9] In that case, the Mississippi Supreme Court had to decide whether to allow a creditor to invade a spendthrift trust to satisfy claims against the beneficiary. There, the creditor was the plaintiff in a lawsuit against the beneficiary where the plaintiff had been severely injured in an automobile accident where the beneficiary was driving drunk. The beneficiary’s mother, the settlor of the trust, allegedly knew of her son’s propensity to drive drunk and established the trust to protect her son from his own mistakes. Ultimately, the Mississippi Supreme Court held “as a matter of public policy, that a beneficiary’s interest in spendthrift trust assets is not immune from attachment to satisfy the claims of the beneficiary’s intentional or gross negligence tort creditors, and that such claims take priority over any remainder interests in such assets.” Shortly after the Sligh opinion, the outcome was legislatively overruled by passage of the Family Trust Preservation Act of 1998.[10]
Distribution Standards
With spendthrift trust protection clearly a part of United States law, the question still remains as to what rights a creditor may have to a non-settlor beneficiary’s interests in an irrevocable trust. In Mississippi,[11] to a large extent, that is determined by the distribution standard applicable to the beneficiary’s interest.
- Discretionary Interest: A discretionary interest is one that is not a mandatory or support interest and is one where the trustee has discretion to make or withhold the distribution.[12] A creditor cannot “force or otherwise reach a distribution with regard to a discretionary interest.”[13] A discretionary interest is not a property right of the beneficiary, but rather a mere expectancy.[14] This is the case even if the beneficiary is a trustee.[15]
- Support Interest: A support interest is one where the trustee “shall” make distributions, but that obligation is coupled with a standard capable of judicial interpretation such as for the beneficiary’s “health, education, maintenance, and support.”[16] While the beneficiary has the right to enforce the support standard on the trustee, the interest is not a property interest of the beneficiary similar to a discretionary interest.[17] Also, although creditors may reach assets distributed to a beneficiary, creditors may not reach such assets distributed to the beneficiary which are necessary for the health, education, maintenance, and support of the beneficiary (i.e. the creditor can only reach any distribution to the extent it exceeds this amount).[18]
- Mandatory Interest: A mandatory interest is one where “the timing of any distribution must occur within one (1) year from the date the right to the distribution arises and the trustee has no discretion in determining whether a distribution shall be made or the amount of such distribution”[19] Past due mandatory distributions may be ordered by a court, but not directly to the creditor and, as noted above, any mandatory distributions may be paid by the trustee directly to third parties on behalf of the beneficiary which will not render those payments subject to the beneficiary’s creditors.[20]
As stated above, this codification of distribution standards is not uniform. However, at least in concept, similar principles apply in states other than Mississippi. Likewise, Mississippi is very protective of the right of a trustee to directly pay expenses of the beneficiary, even to the exhaustion of the trust, without causing those payments to be considered distributions subject to creditors’ claims. Other states do not necessarily follow this rule.
Conclusion
In the United States, trust beneficiaries have the benefit of robust spendthrift protection. This follows the rationale that the settlor of the trust has the right to dispose of their assets as they desire, including placing restraints on the alienation of those assets. If the settlor expresses an intention to create a spendthrift trust, then these protections will apply. After all, while it may seem inequitable for a beneficiary to have significant wealth available for their benefit yet leave their creditors without any remedy, the assets of a spendthrift trust were not the beneficiary’s assets which ever would have been subject to the creditor’s claims. Those assets belonged to someone else who could place stipulations on the use of assets placed in trust. That said, certain states recognize public policy exceptions to this general rule. Also, once trust assets are distributed and in the hands of the beneficiary, those protections are lost.
Although the law seems fairly clear in this regard, there are a number of items which must be considered such as the standards appliable to distributions (fully discretionary on the part of the trustee; the trustee shall distribute for the beneficiary’s health, education, maintenance, and support; the trustee shall distribute X% upon the beneficiary attaining age Y; etc.), whether the trustee may pay third parties on behalf of the beneficiary without being deemed to have distributed funds into the hands of the beneficiary subjecting those assets to claims, whether the beneficiary’s interest in the trust constitutes a property right subject to third party rights, etc. At least in Mississippi, the law is protective of spendthrift protections as seen in both the anti-Sligh legislation and subsequent adoption of Article 5 to Mississippi’s UTC.
This robust protection serves to incentivize donors to place assets for their intended beneficiaries, whether in making lifetime gifts or transfers at death, in trust. If the assets transferred to one’s intended beneficiary will be protected to be used for their benefit, even if the beneficiary is involved in a divorce, subject to judgments, or otherwise liable to third parties, then why would many donors choose to place those assets directly in the hands of the beneficiary? This is especially true when trusts can be flexibly drafted providing beneficiaries with significant rights and powers. For example, most parents, as part of their estate plans, pass assets for their children. In my experience, those parents would much rather their children benefit from the assets left behind than to see those assets paid to divorcing spouses, bankruptcies, judgment creditors, etc., even if their child’s own misconduct caused these events. Proper use and preparation of spendthrift trusts can help achieve those intentions.
[1] Restatement (Third) of Trusts § 58; Uniform Trust Code (“UTC”) § 502; Miss. Code Ann. § 91-8-502.
[2] UTC § 501; Miss. Code Ann. § 91-8-501.
[3] UTC § 502(c).
[4] Miss. Code Ann. § 91-8-501(a). Note that the Mississippi trust code is clear that payment by the trustee of trust income or principal for the benefit of the beneficiary, rather than a distribution directly to the beneficiary, is not considered “paid to the beneficiary.” See Miss. Code Ann. § 91-8-503(b)(3), -505(a)(5), and -505(b)(2). This is not necessarily the law in all states where payments to third parties may be seen as a distribution to the beneficiary subject to a creditor’s garnishment lien against the beneficiary’s distributions.
[5] Restatement (Third) of Trusts § 58(2); UTC § 505; Miss. Code Ann. § 91-8-504(a)(2). Note that this exception does not apply to the extent of a settlor’s interest in a domestic asset protection trust (“DAPT”) established under the laws of a state (at least for residents of that state following the requirements of the relevant statute, there being some debate about applicability to residents of a non-DAPT state). For example, see Miss. Code Ann. §§ 91-9-701 et seq. and Parker Durham, “Mississippi Domestic Asset Protection Trusts – A Viable Asset Protection Method,” July 16, 2025, https://esapllc.com/mississippi-dapt-asset-protection-method-2025/.
[6] Although a discussion of these circumstances is beyond the scope of this writing, see the comment f. to the Restatement (Third) of Trusts § 58. Some examples include where the beneficiary furnishes consideration for assets that fund the trust, disclaimers by a beneficiary into the trust, certain litigation settlements, reciprocal trusts, appointment of assets originally transferred into trust by the settlor which are appointed back into further trust for the settlor (relation back doctrine), etc. See also, Gray Edmondson, “The Not so Obvious, but Highly Ubiquitous Self-Settled Trust,” American College of Trust and Estate Counsel Annual Meeting, La Quinta, California, March 20, 2019.
[7] See, e.g., UTC § 503.
[8] Nichols v. Eaton, 91 U.S. 716 (1875). See also, Broadway National Bank v. Adams, 133 Mass. 170 (1882); and Sherrow v. Brookover, 189 N.E. 2d 90 (1963). For a discussion of the arguments for and against spendthrift trust protections, see Spendthrift Trusts in the United States, Bogert’s The Law of Trusts and Trustees, § 222.
[9] Sligh v. First Nat. Bank of Holmes County, 704 So.2d 1020 (Miss. 1997).
[10] Miss. Code Ann. § 91-8-503 which was later repealed upon Mississippi’s adoption of Article 5 to the UTC.
[11] Note that the UTC provisions create a similar outcome but in a different manner. See, e.g., UTC §§ 504 and 506 as well as the comments to these provisions.
[12] Miss. Code Ann. § 91-8-103(9)(B)(iii). This statute provides examples of language which would create a discretionary interest.
[13] Miss. Code Ann. § 91-8-503(b)(2).
[14] Miss. Code Ann. § 91-8-503(a). In this writer’s opinion, this is significant insofar as it clarifies that any rights a third party may have the beneficiary’s “property,” such as a spouse in a divorce proceeding, has no right to the beneficiary’s discretionary interest in a trust or the value thereof as it does not constitute the beneficiary’s property in any event.
[15] Miss. Code Ann. § 91-8-503(b)(5).
[16] Miss. Code Ann. § 91-8-103(9)(B)(ii).
[17] Miss. Code Ann. § 91-8-505(a)(1).
[18] Miss. Code Ann. § 91-8-505(a)(2) and (3).
[19] Miss. Code Ann. § 91-8-103(9)(B)(i).
[20] Miss. Code Ann. § 91-8-505(b).
