Last year, New Jersey adopted its version of the Uniform Trust Code (Code). The Code provides for a concise statement of the laws governing trusts in New Jersey.  Prior to the passage of the Code, most of New Jersey’s trust law came from case law.  Many of those cases were old—some were very, very old—and the holding of one case might contradict the holding of another case.

For this reason, it was often hard to discern a rule governing trusts in New Jersey. The uncertainty that existed in New Jersey trust law is one of the reasons our state passed the Code.  Since the passage of the Code, I have had the opportunity to review the new statutes and to discuss the impact of the law with some of my colleagues.

The Code solidifies the usage of a spendthrift clause in a trust. A spendthrift clause is a clause in a trust that prevents the creditors of a beneficiary from accessing the assets of the trust to pay the debts of the beneficiary as long as the assets are held in the trust.  A spendthrift trust also prevents the beneficiary from giving away or encumbering the assets of the trust for his own benefit.

For instance, assume that Mr. Smith dies and leaves his son Joe an inheritance. Mr. Smith’s Will directs that any inheritance passing to Joe will be held in trust for Joe’s benefit.  The trust in Mr. Smith’s Will for Joe’s benefit—called a testamentary trust—contains a spendthrift clause.

Assume that Joe gets sued—because he was involved in a car accident or because he owes credit card debt that he cannot pay. Or assume that Joe is getting divorced.  The spendthrift clause in Joe’s trust would prevent Joe’s creditors from accessing the inheritance Mr. Smith left to Joe to pay any debt owed to the creditor.  The spendthrift clause would prevent Joe’s soon-to-be ex-wife from accessing the money being held in the trust in the course of the divorce proceeding.

The spendthrift clause would also prevent Joe from giving away the money in the trust. Joe could not decide to simply take the money out of his trust and give it to his wife.  The spendthrift clause would prevent Joe from going to a bank and using the trust as collateral for a loan that he wants to take.

In short, a spendthrift trust is a very powerful tool. A spendthrift clause can protect Mr. Smith’s inheritance for Joe’s benefit for decades after Mr. Smith dies.

Before the passage of the Code, I was reluctant to create trusts for beneficiaries of an estate because case law appeared to require someone other than the beneficiary of the trust to serve as the trustee of the trust. For instance, Mary, Mr. Smith’s daughter, would have to serve as the trustee of Joe’s trust in order to protect the assets in Joe’s trust from Joe’s creditors or ex-wife.  Joe could not serve as sole trustee.

In my opinion, having someone else serve as trustee is a recipe for trouble. If Mary is trustee for Joe, inevitably, there will be conflict between Mary and Joe.  Joe will believe—rightly or wrongly—that Mary isn’t giving him “his money” when she should be giving him the money.  If a bank is appointed as trustee, the bank will charge fees and Joe will probably believe that the bank isn’t giving him “his money” when it should be giving him his money.

The Code makes it clear that Joe can serve as trustee of his own trust and that his serving as trustee does not weaken the spendthrift clause. To me, this is great, because now, I can draft a spendthrift trust in Mr. Smith’s Will for Joe’s benefit and have Mr. Smith name Joe as trustee of his own trust.

For safety sake, I can draft language in the trust that says if Joe is ever sued or if Joe ever gets divorced, then Mary, Joe’s sister, will serve as trustee of Joe’s trust while the lawsuit is pending. After the lawsuit is resolved, Joe can resume the role of trustee.

This language offers total protection for Joe’s inheritance for decades and decades following Mr. Smith’s death and avoids conflicts that can tear families apart.