A spendthrift trust in bankruptcy is generally excluded from the debtor’s bankruptcy estate. Under 11 U.S.C. § 541(c)(2), a transfer restriction that is enforceable under state law is enforceable in bankruptcy. The protection has limits: in California, creditors can reach payments already due and part of future payments, and self-settled trusts face a 10-year look-back.
Reviewed and updated November 9, 2026. Darren Chaker, a San Diego legal research and records specialist, reviewed the statutes and cases in this guide.
Key Takeaways
- Section 541(c)(2) of the Bankruptcy Code honors spendthrift restrictions that are valid under state law, keeping the trust out of the estate.
- In Patterson v. Shumate (1992), the Supreme Court held that “applicable nonbankruptcy law” includes federal law such as ERISA, not only state spendthrift law.
- In Carmack v. Reynolds (2017), the California Supreme Court held that a creditor can reach distributions already due and up to 25 percent of anticipated payments, subject to support needs.
- Under § 548(e), a trustee can avoid transfers to a self-settled trust made within 10 years before bankruptcy with actual intent to hinder, delay, or defraud creditors.
- Nevada allows self-settled spendthrift trusts that meet NRS 166.040, with a short limitation period for creditor challenges under NRS 166.170.
What Is a Spendthrift Trust?
A spendthrift trust contains a provision that prevents the beneficiary from transferring his interest and prevents creditors from reaching it before it is paid out. Parents often use them to protect a child’s inheritance. Because the beneficiary cannot assign the interest, a creditor generally cannot seize it either. The protection applies to the trust property; once money is distributed to the beneficiary, it can usually be reached like any other asset.
How Does Patterson v. Shumate Apply Section 541(c)(2) in Bankruptcy?
When a person files for bankruptcy, nearly all of his property interests become part of the bankruptcy estate. Section 541(c)(2) is a key exception: a restriction on transferring a beneficial interest in a trust that is enforceable under applicable nonbankruptcy law is enforceable in bankruptcy. A spendthrift clause valid under state law therefore keeps the trust out of the estate.
In Patterson v. Shumate, the trustee argued that “applicable nonbankruptcy law” meant only state spendthrift law. The Supreme Court disagreed, holding that the phrase includes federal law. As a result, the anti-alienation provision required in ERISA-qualified pension plans keeps those plans out of the bankruptcy estate.
How Much Can Creditors Reach Under Carmack v. Reynolds in California?
California’s spendthrift statutes in the Probate Code, beginning at § 15300, contain exceptions that were unclear until 2017. The Ninth Circuit certified the question to the California Supreme Court. In Carmack v. Reynolds, 2 Cal. 5th 844 (2017), the court, in an opinion by Justice Liu, held that a general creditor may reach the full amount of distributions currently due and payable, even if still held by the trustee, and separately may reach up to 25 percent of anticipated payments. Amounts the beneficiary needs for support are excluded. Horvitz & Levy’s analysis notes that the court found the statutes “opaque” and concluded one provision likely reflects a drafting error.
The Ninth Circuit then applied that answer in In re Reynolds, reversing the Bankruptcy Appellate Panel and remanding so the bankruptcy court could calculate what the estate could take. For California debtors, the practical result is that a spendthrift trust offers strong, but not complete, protection in bankruptcy.
What About Self-Settled Trusts?
A self-settled trust is one where the person creating the trust is also a beneficiary. California does not protect self-settled spendthrift trusts from the settlor’s creditors. Several states do, including Nevada. Under NRS 166.040, a settlor may create a spendthrift trust for his own benefit if the trust is irrevocable, does not require distributions to the settlor, and was not intended to hinder, delay, or defraud known creditors. NRS 166.170 gives existing creditors only two years after the transfer, or six months after discovery, whichever is later, to challenge it.
Bankruptcy law adds a longer reach-back. Section 548(e), added in 2005, allows the bankruptcy trustee to avoid transfers to a self-settled trust made within 10 years before the petition if the debtor made the transfer with actual intent to hinder, delay, or defraud creditors. A Nevada asset protection trust that survives state-law challenges can still be unwound in bankruptcy if the transfer was made to avoid creditors.
Planning Points
- Third-party trusts are strongest. A trust created by a parent for a child, with a proper spendthrift clause, has the clearest protection under § 541(c)(2).
- Distributions due are exposed. In California, payments already due when a petition is filed can be reached, so trustees should consider timing and the support exception.
- Self-settled trusts need time. Transfers made while a claim is pending or anticipated invite fraudulent-transfer and § 548(e) challenges.
- Retirement plans are separate. ERISA-qualified plans are excluded under Patterson, and IRAs have their own exemption rules.
Related reading from Darren Chaker includes electronic discovery in civil litigation and the dismissal of a civil RICO lawsuit against a blogger.
Key Authorities
- 11 U.S.C. § 541(c)(2) (“A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.”).
- Patterson v. Shumate, 504 U.S. 753, 758 (1992) (“The natural reading of the provision entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law.”).
- Id. at 759 (“Plainly read, the provision encompasses any relevant nonbankruptcy law, including federal law such as ERISA.”).
- In re Reynolds, No. 12-60068, slip op. at 4 (9th Cir. Aug. 15, 2017) (per curiam) (“The estate may also reach 25 percent of expected future payments from the spendthrift trust, reduced by the amount the beneficiary needs to support himself and his dependents.”).
- 11 U.S.C. § 548(e)(1) (trustee may avoid a transfer “made on or within 10 years before the date of the filing of the petition” to “a self-settled trust or similar device” if made “with actual intent to hinder, delay, or defraud”).
What Can Creditors Still Reach in California?
In short, a spendthrift clause slows creditors down but rarely stops them entirely. For example, the following categories are treated differently under the Probate Code.
| Type of claim | Rule | Statute |
|---|---|---|
| Self-settled trust | Spendthrift clause is invalid against the settlor’s creditors | Prob. Code § 15304 |
| Child or spousal support | Court may order payment from the trust | Prob. Code § 15305 |
| General creditor, payments due | Payments due and payable may be reached | Prob. Code § 15301(b) |
| General creditor, future payments | Up to 25 percent, less support needs | Prob. Code § 15306.5 |
Can a bankruptcy trustee reach any part of a California spendthrift trust?
Yes, in limited amounts. In Carmack v. Reynolds, 2 Cal. 5th 844 (2017), the California Supreme Court explained that a trustee may reach distributions that are already due and, subject to the beneficiary’s support needs, a portion of future payments under Probate Code §§ 15301 and 15306.5. However, the 25 percent figure in section 15306.5 is a ceiling, not an automatic award.
Why does federal bankruptcy law honor spendthrift clauses at all?
Because section 541(c)(2) of the Bankruptcy Code defers to state law. The Supreme Court held that “[t]he natural reading of the provision entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law.” Patterson v. Shumate, 504 U.S. 753, 758 (1992).
Frequently Asked Questions
Is a spendthrift trust part of the bankruptcy estate?
Generally no. Under 11 U.S.C. section 541(c)(2), a spendthrift restriction enforceable under state or federal law keeps the trust out of the bankruptcy estate.
Can a bankruptcy trustee reach spendthrift trust distributions in California?
Partly. Under Carmack v. Reynolds, the estate can reach distributions already due and up to 25 percent of expected future payments, reduced by what the beneficiary needs for support.
Does a Nevada asset protection trust protect against bankruptcy?
Not completely. Even if valid under Nevada law, a transfer to a self-settled trust within 10 years of bankruptcy can be avoided under section 548(e) if made with intent to hinder, delay, or defraud creditors.
This article is for general information only and is not legal advice. Learn more about Darren Chaker. Last reviewed November 2026.
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