In Texas family law, few asset protection tools generate as much discussion—or as much litigation—as spendthrift trusts. For wealthy families in Houston, The Woodlands, Katy, and across the Greater Houston area who have used trusts for estate planning, the question of whether a spendthrift trust actually protects against a divorcing spouse’s claims is one with significant financial consequences. The answer, as with most things in law, is: it depends.
What Makes a Trust a Spendthrift Trust?
A spendthrift trust includes a provision restricting the beneficiary’s ability to voluntarily assign their trust interest and preventing creditors from reaching the trust assets before they’re actually distributed to the beneficiary. Under Texas Property Code Section 112.035, spendthrift provisions in Texas trusts are generally valid and enforceable.
The rationale is paternalistic: the trustmaker (grantor) wants to ensure that a beneficiary—perhaps one with a history of financial difficulty, or simply a young person who hasn’t yet demonstrated sound judgment—cannot impulsively sign away their inheritance or have it seized by creditors. Texas has long recognized this as a legitimate goal, and Texas courts generally respect spendthrift provisions.
Spendthrift Protection Against a Divorcing Spouse
Here’s the key question: does a spendthrift provision prevent a divorcing spouse from reaching the trust assets in a Texas divorce?
The answer is generally yes for the trust corpus (the principal assets held in trust). If a spendthrift trust was established by a third party (the beneficiary spouse’s parent, grandparent, or other family member) and funded with that third party’s separate property, Texas courts will generally treat the trust assets as the beneficiary spouse’s separate property. The spendthrift clause further insulates those assets from division, because the non-beneficiary spouse is treated as a creditor who cannot reach the trust before distribution.
However, the analysis changes in several important situations:
First, income distributed from the trust during the marriage is typically community property. Texas law (and the consistent interpretation of Texas courts) holds that even if trust assets are protected, income that flows from those assets to the beneficiary spouse during the marriage becomes community property once received. The non-beneficiary spouse has legitimate community property claims to that income.
Second, if the beneficiary spouse has received discretionary distributions that were commingled with community funds, tracing those funds can be difficult and potentially expose more of the estate to community property claims.
Third, if community funds were used to improve, maintain, or pay expenses on trust assets, the community estate may have a reimbursement claim against the trust.
Self-Settled Spendthrift Trusts: A Different Standard
A self-settled trust is one where the grantor (the person who created and funded the trust) is also a beneficiary. Texas historically has not allowed self-settled trusts to be used as asset protection vehicles against creditors—meaning a person couldn’t just put their own assets into a spendthrift trust and claim protection from their own creditors, including a divorcing spouse.
Texas does permit Domestic Asset Protection Trusts (DAPTs) in some limited circumstances, but these have specific requirements and limitations. For a trust established by the divorce spouse themselves—as opposed to a family member—the spendthrift protection is much less robust. Courts will look closely at whether a self-settled trust was created in anticipation of divorce as a fraudulent transfer.
Trustee’s Role During Divorce Proceedings
One underappreciated aspect of spendthrift trusts in divorce is the role of the trustee. An independent trustee has a fiduciary duty to the beneficiary and must manage and distribute trust assets according to the trust’s terms. During a divorce, a trustee should not be taking direction from the divorcing beneficiary on whether and when to make distributions that might affect the divorce proceedings. Courts have sanctioned trustees who manipulated distributions to disadvantage a divorcing spouse.
Conversely, trustees should not make unusual large distributions to a beneficiary in anticipation of divorce—particularly in discretionary trusts—as this can look like an attempt to defeat community property claims by converting trust assets into arguably separate assets.
For Houston families with significant trust wealth, the divorce process must involve trust attorneys working alongside family law counsel. The stakes are high, and the rules are complex.
Legal Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. Every divorce case is unique, and the information presented here may not apply to your specific situation. Laws and regulations change frequently. For advice tailored to your circumstances, please consult a licensed family law attorney. Contacting Anunobi Law or reading this article does not create an attorney-client relationship.