What is a Spendthrift Provision and How Can it Help in a North Carolina High Net Worth Divorce?

If you are committed to protecting your assets during a high net worth divorce in the Charlotte region, you might already know a thing or two about trusts. A trust is probably one of the best ways to protect your assets and make sure that your chosen beneficiaries get access to your funds - not a scheming former spouse. That being said, not all trusts are created equal. As any financial expert will tell you, the way in which a trust is drafted has an enormous impact on the divorce process, including equitable distribution.

A spendthrift provision (also known as a spendthrift clause) can provide your trust with even more protection during a divorce. You may want to make sure that your business can continue to operate after assets are divided during a divorce. Perhaps you want to ensure that your children get access to the trust, and not your former spouse. Whatever the case may be, a trust with a spendthrift provision can come in very handy at times, especially during a high net worth divorce.

Of course, you will also need help from a qualified, experienced divorce attorney if you want to protect your assets during a divorce. When you enlist the help of a legal expert who has considerable experience with high net worth divorces in North Carolina, it becomes easier to approach this situation efficiently. With the right legal representation, you can fight to keep hold of assets that are rightfully yours.

Originally, spendthrift trusts were intended for individuals who were very irresponsible with their money. The trustee was able to provide strong oversight, ensuring that beneficiaries did not blow all of their inheritance on a horse race or a night out in Vegas. Today, spendthrift provisions are popular for a completely different reason — they offer considerable protection of one’s assets.

In the context of a divorce, a spendthrift provision ensures that your children are able to access your funds, without the prying hands of creditors, former spouses, and anyone else who seeks access to the trust through legal action. In broad terms, a spendthrift provision prevents a beneficiary from using distributions to secure credit or paying creditors.

Under North Carolina law, spendthrift provisions are recognized and upheld in court. According to the wording of the statute, a spendthrift provision can “restrain both voluntary and involuntary transfer of the beneficiary's interest.” The law also states that “a beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision.” 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.”

So, what does this all mean in the context of a high net worth divorce? While claims of a spouse or child cannot be viewed as debts, a spendthrift provision does provide sound protection against alimony claims during a divorce. While the beneficiaries can still access the trust to receive child support payments, they typically cannot access the funds for alimony payments. This means that your child’s inheritance is protected from being siphoned away due to alimony payments.

To fully understand the benefits of a spendthrift provision, you need to understand what qualifies as a “creditor.” Because spendthrift provisions are set up to protect your trust against creditors, the legal definition of a “creditor” becomes crucial in a divorce. The real question here is whether your former spouse is considered a “creditor” in the eyes of the law when they try to gain access to your trust during a divorce.

Different states have different stances on this subject. North Carolina offers some protections when a spouse has a spendthrift provision, but these protections only go so far. Your spouse can still access the trust for child support payments, but not alimony. On the other hand, there are two states that allow no “exception creditors.” This means that even your former spouse is considered a creditor in the eyes of the law, and they cannot violate the spendthrift provision in any way. These two states are Nevada and Utah, and they have become quite popular for those who want to protect their assets in the eventuality of a divorce.

If you have been searching the Mecklenburg County area for a qualified, experienced divorce attorney, look no further than Arnold & Smith, PLLC. With offices conveniently located in Charlotte and surrounding cities, you can set up a consultation at your earliest convenience. We have considerable experience with virtually every aspect of a high net worth divorce, including matters related to trusts and spendthrift provisions. Reach out today, and we can get the ball rolling immediately.