How a Spendthrift Trust Can Help Protect an Inheritance During Divorce

There may be concern when a large inheritance is meant to pass directly to an adult child. This may have nothing to do with the child's ability to manage money; it can be tied to the possibility of a future divorce. If the child inherits substantial assets, could a spouse eventually claim part of them?

South Carolina law gives inherited property favorable treatment in divorce, and a properly structured trust can add further protection by allowing an inheritance to remain in trust rather than placing the entire amount in the beneficiary's hands at once.

For help with trust establishment, wills, or holistic estate planning in Myrtle Beach and throughout the Grand Strand area, call Bespoke Estate Law to schedule an appointment.

Generally, An Inheritance is Separate Property in South Carolina

Under S.C. Code § 20-3-630(A)(1), property acquired through an inheritance, devise, bequest, or gift from someone other than a spouse generally qualifies as “non-marital property.” That gives someone who inherits property from a parent or grandparent strong footing in the event of a divorce.

Problems can still arise afterwards. Inherited money may find its way into accounts that contain marital funds, or it may be used to purchase jointly titled property or otherwise become intertwined with the family's finances. In such instances, courts can examine whether originally non-marital property has undergone transmutation based on the way the spouses treated it during the marriage.

For someone creating an estate plan, one way to reduce that exposure is to reconsider whether a beneficiary needs to receive the inheritance outright.

Why Leave the Inheritance in Trust?

Suppose a mother wants to leave $600,000 to her daughter. Her estate plan could direct the trustee to distribute all $600,000 when the mother dies. Her daughter would then own the money personally and decide what to do with it.

She might keep it in a separate investment account, or she might even place part of it in a joint account with her husband, use $150,000 toward a jointly owned home, or pay family expenses from it over the next decade. If that marriage later ends, the history of those funds may suddenly become relevant.

However, the mother's estate plan could have taken a different approach. The $600,000 could remain in a trust created for her daughter's benefit, with the trust continuing for many years or even for the daughter's lifetime. The daughter can benefit from the property without necessarily taking outright ownership of the entire inheritance.

What Does a Spendthrift Clause Do?

A spendthrift provision restricts a beneficiary's ability to transfer an interest in a trust and also restricts creditors from reaching that interest before the beneficiary receives it.

See S.C. Code § 62-7-502. A valid spendthrift provision must restrain both voluntary and involuntary transfers of the beneficiary's interest. The statute generally prevents a creditor or the assignee from reaching the protected interest or a trustee's distribution before the beneficiary receives it.

Note the final part of that rule. The protection applies while the property remains within the trust and before a distribution reaches the beneficiary.

A spendthrift clause should not be described as a guarantee that a trust is "divorce-proof." Divorce involves rules concerning marital property that are separate from ordinary creditor claims. Still, keeping inherited property within a properly designed trust can place the beneficiary in a much different position than receiving the same property outright.

Trustee Discretion Can Add Strength To Your Plan

Distribution provisions can be just as important as the spendthrift paragraph. Consider a trust that requires the trustee to give a beneficiary one-third of the inheritance at age 30, another third at 35, and everything else at 40. A discretionary trust would handle this differently.

In a discretionary trust, the trustee may have authority to make distributions based on the standards established by the person who created the trust. S.C. Code § 62-7-504 generally prevents a beneficiary's creditor from compelling a distribution from a discretionary trust, subject to the exceptions contained in the statute.

For families particularly concerned about divorce, creditor problems, or poor financial decisions, the amount of control given to the beneficiary should be discussed with an estate planning attorney when the trust is created..

Mandatory Distributions

South Carolina law treats required trust distributions differently from discretionary ones. If a trust says that a beneficiary must receive a certain amount at a certain time, and the trustee fails to make that payment, a creditor may be able to reach it. In other words, once the beneficiary has a clear legal right to receive the money, the protection may be weaker than it was while the trustee still had discretion over whether to make a distribution.

This is one reason an estate plan that says, "Give my son everything when he turns 40," opens the door to potential problems when that date comes around..

Be aware that neither structure is automatically appropriate for every family. Plenty of parents want their children to receive property outright. The important point is that the distribution language should reflect what the parent actually wants the trust to accomplish.

What Happens After Money Leaves the Trust?

The South Carolina Supreme Court considered trust distributions in the 2013 case of Wilburn v. Wilburn. The Court concluded that the assets held inside the trust itself (the trust corpus) were not marital property because neither spouse owned them outright. The Court also held that trust distributions can become marital property depending on how and when the beneficiary received them and whether the couple later treated those funds as part of the marriage (transmutation).

The facts are useful for estate planning. Distributions from the trust were deposited into an investment account, and funds from that account were used to support the marriage. Based on the circumstances, the Court found that the parties intended to treat the right to receive the distributions as marital property.

The husband also raised an argument based on the trust's spendthrift provision, although the Supreme Court did not decide that issue because it had not been preserved for appellate review.

Here’s the broader lesson: property that remains inside a trust and money that has already been distributed to a beneficiary can bring up very different issues in a divorce.

What Happens to a Distribution?

Imagine that a grandfather leaves $750,000 in a lifetime trust for his grandson. The trust contains a spendthrift provision, and an independent trustee has discretion over distributions.

Ten years later, the grandson is married and asks the trustee for $150,000. He receives the distribution and deposits it into the checking account he shares with his wife. The couple then uses $100,000 toward the purchase of a house titled in both names.

Those facts do not automatically tell us how a South Carolina family court would classify every dollar if the couple divorced. They do show how an inheritance that began inside a carefully drafted trust can become much harder to separate after certain life choices are made.

A Spendthrift Trust Has Limits

Spendthrift protection also has statutory exceptions. For example, S.C. Code § 62-7-503 permits certain claims involving support or maintenance for a beneficiary's child despite a spendthrift provision.

There is yet another limitation worth understanding: the asset-protection discussion in this blog concerns a trust created by someone such as a parent or grandparent for another person's benefit. But placing your own property into an ordinary revocable trust does not produce the same creditor protection. According to S.C. Code § 62-7-505, property in a revocable trust remains subject to the settlor's creditors during the settlor's lifetime.

Frequently Asked Questions About Spendthrift Clauses

Can My Son-in-Law or Daughter-in-Law Receive Part of My Child's Inheritance in a Divorce?

Usually, an inheritance from a third party begins as non-marital property in South Carolina. What happens to the property afterward can affect that status. Commingling, joint ownership, and the way inherited property is used during the marriage may become relevant in a later divorce.

Is a Spendthrift Trust Divorce-Proof?

No, a spendthrift provision simply provides meaningful protection against transfers and many creditor claims while property remains in trust. Divorce raises different questions within South Carolina’s marital property law.

Should My Child Be the Trustee of Their Own Inheritance Trust?

That depends on the trust and the amount of control the beneficiary receives. An independent trustee may provide additional separation in certain asset-protection plans, although beneficiary-trustees are also possible under appropriately drafted trust terms.

What Happens If My Child Deposits a Trust Distribution Into a Joint Bank Account?

Doing so can complicate the classification of the funds if the marriage later ends. Wilburn v. Wilburn demonstrates that South Carolina courts may examine how trust distributions were used and whether the parties treated the interest as marital property.

Can I Require My Child to Receive the Entire Inheritance at a Certain Age?

Yes. A trust can require distributions at designated ages or times. Mandatory distributions, however, remove assets from the continuing protection of the trust and are treated differently from discretionary interests under South Carolina trust law.

Can I Add a Spendthrift Clause to My Existing Trust?

Possibly. If you have a revocable estate plan, an attorney can review the existing document and determine whether beneficiary trusts, spendthrift provisions, or different distribution terms can be incorporated before the plan becomes irrevocable.

Protect Beneficiaries With Your Estate Plan

Simplicity is not always the only objective! Parents and grandparents should consider how inherited wealth will be protected if a beneficiary later divorces or experiences creditor problems.

A continuing trust with appropriate spendthrift language and carefully drafted distribution provisions can provide an alternative to handing over the entire inheritance at once. From estate planning in Murrell’s Inlet to trust formation in Wilmington, Bespoke Estate Law helps families develop trusts and estate plans around the property they own and the people they want to protect.