Are Spendthrift Provisions Recognized in North Carolina Courts?

If you are going through a high net worth divorce in the Charlotte area, you might be especially concerned about equitable distribution. Losing your hard-earned assets can be a nightmare, especially if you are trying to run a business and pay your bills. You may also be concerned about your estate, and the amount of inheritance your children will receive after the divorce is finalized. It does not make sense to let a former spouse take a wrecking ball to everything you have worked so hard to build, and this is why many spouses work diligently to protect their assets.

One popular method is to establish a trust. A trust can provide strong protections during a divorce, but only if it is drafted carefully. There are many loopholes and gaps that a spouse might be able to exploit. You may have heard of something called a spendthrift provision. Perhaps your trust already has this provision. But how exactly does this work in North Carolina? Do courts in the Tar Heel State recognize a spendthrift provision? What kinds of protection does it offer?

All of these questions and many others can be easily answered by an experienced, qualified divorce attorney. Team up with a lawyer who has experience with high net worth divorces in the Mecklenburg County region, and you can approach this situation with a measure of clarity and efficiency. These legal professionals can guide you through virtually every aspect of a high net worth divorce, and they can help you take steps to protect your assets in the process.

Spendthrift provisions were first created by individuals who were concerned about the spending habits of their beneficiaries. A classic example is a father who has a son with a severe gambling problem. This concerned parent would set up a spendthrift provision to ensure their son would not simply squander their entire inheritance on a hand of poker or on a single boxing match.

Simply put, a spendthrift provision prevents a beneficiary from using the funds from a trust to pay off their debts. The trustee is given considerable oversight to ensure the funds are not being spent in this manner, and so the assets are given considerable protection from frivolous or reckless spending. Today, spendthrift provisions have also become popular in the context of divorces because of these same protections.

North Carolina formally recognizes the validity of spendthrift provisions in its courts, and the state has its own statute that governs how these provisions are handled. First, the transfer of a beneficiary’s interest is restrained both voluntarily and involuntarily. Secondly, the statute states that “a beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision.” This means that spendthrift provisions are recognized. Finally, “a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.” This means that a creditor of your beneficiary, is not likely to be able to access the trust funds, unless they have been already distributed to the beneficiary.

What it comes down to is this: A spendthrift provision stops your former spouse from receiving alimony from your trust in North Carolina. Essentially, your ex’s “living expenses” are classified as a kind of debt - and your spouse would be considered a creditor in this context. On the other hand, the spendthrift provision does not prevent your spouse from receiving child support payments from the trust. North Carolina considers these payments to be for the direct use of your beneficiaries (your children). However it is important to discuss these issues with a qualified North Carolina divorce attorney to determine if your trust includes these provisions and whether or not a spendthrift provision protects your trust assets.

Many concerned spouses have their trusts drafted in Nevada. Why? Because Nevada specifically allows no “exception creditors.” As the name suggests, an exception creditor is a party that is considered an exception to the normal rules that apply to creditors. Spendthrift provisions do not apply to exception creditors. Because Nevada does not allow any exception creditors, the spendthrift provision offers almost complete protection against any spouse that tries to access your trust during a divorce. With all that said, North Carolina still recognizes spendthrift provisions, and they offer a considerable amount of protection.

If you need help with a high net worth divorce in the Charlotte area, look no further than Arnold & Smith, PLLC. We have a wealth of experience with high net worth divorces, and we understand the role of trusts and spendthrift provisions in the overall process. Our offices are conveniently located in Mecklenburg, Union and Iredell Counties, so reach out today to learn more about your legal options.