In many jurisdictions, will a third-party trust be subject to creditors of the beneficiary?

• A. True
• B. False
• C. Only if the trust contains a spendthrift clause
• D. Only if the beneficiary is insolvent

Answer: (A)

Think about how a trust interacts with creditors. A third-party trust is created by someone other than the beneficiary to benefit the beneficiary, so the beneficiary doesn’t own the trust assets themselves. But the beneficiary’s creditors can still reach the beneficiary’s rights to receive trust distributions, and in some cases the trust assets can be reached depending on state law and the trust’s terms. In many jurisdictions, unless there are strong protective features like a valid spendthrift clause, the beneficiary’s creditors have a way to access money the trust would otherwise pay to the beneficiary. The idea is that the protection is not absolute for third-party trusts; the shield depends on how the trust is drafted and what claims the creditor can bring. That’s why, in many places, a third-party trust can still be subject to the beneficiary’s creditors. Of course, there are exceptions where a spendthrift clause or other protections limit creditor access, and certain kinds of claims (like child support or taxes) can still get through despite protections.