Trusts are fundamentally agreements based on the trust and confidence between the trustee and the grantor, who is the person making the trust. The trust agreement authorizes the trustee to administer the trust assets and distribute them to the beneficiaries named in the trust, according to the terms of the trust document. A spendthrift trust is a specific type of trust that you should consider including in your estate plan.
How a spendthrift trust is defined
A spendthrift trust is the type of trust that provides property control by limiting the beneficiary’s access to the trust principal. Typical restrictions can protect trust property from beneficiaries who could potentially squander that property, as well as, protect the assets from the beneficiary’s creditors.
The main purpose of spendthrift trusts
Spendthrift trusts are most often created by a trust grantor who desires to leave property to a beneficiary whom the grantor is concerned may not have the ability to use the property wisely, or could potentially have problems with creditors. A spendthrift trust can ensure that a portion of the trust property can be made available to the beneficiary, while preventing the beneficiary from squandering it all at once.
Trusts that provide the best asset protection
In order for a trust to be truly effective at protecting assets, it needs to be of the irrevocable variety. “Irrevocable” means the trust cannot be modified after it has been created. The reason it works is that you essentially no longer control the property and, because it cannot be changed or revoked, you cannot get the property back. Therefore, the property is no longer subject to legal claims against you.
Including the appropriate terms for asset protection
There are certain terms that must be included in an irrevocable trust in order to ensure that it will properly protect the assets you place into the trust. First, any interests you leave to your heirs must be either contingent on a future event or condition, or the interest must be subject to the trustee’s complete discretion.
How a spendthrift trust works
Spendthrift trusts place restrictions on the access a beneficiary can have to the trust principal. Primarily, the beneficiaries are not allowed access to the principal, nor can they promise the assets to anyone else. In other words, if a beneficiary cannot access the funds in the trust, those funds would not be subject to their creditors either.
Access is only available through the trustee
Because the beneficiary of a spendthrift trust cannot have direct access to the trust assets, their benefits can only be received through the named trustee. This can be accomplished in the form of a regular payment from the trust, or possibly goods or services bought for the beneficiary by the trustee.
Reasons why most spendthrift trusts are preferred
Spendthrift trusts are generally most useful when the grantor needs to leave property or cash for a beneficiary about whom they are concerned may not be the best at managing that property. Some reasons behind the need for more control might include that the beneficiary is not particularly good with money or is prone to getting in debt with numerous creditors. The beneficiary may also be an addict, which could lead them to squander the proceeds in order to feed that addiction. Beneficiaries who are easily deceived or defrauded may also be in need of protection from a spendthrift trust.
Considerations when creating your spendthrift trust
The first thing to consider is the need to consult an estate planning or trust attorney. Your attorney can help you create your trust by asking detailed questions about what you seek to accomplish. They can help you determine whether a spendthrift trust is actually right for you and your beneficiary.
You should also consider when and how do you want the trust to be terminated and what should happen to the trust principal if the beneficiary’s circumstances change. For instance, if the beneficiary passes away or becomes better able to manage trust funds. Another consideration is whether you need to include provisions that allow for special payouts when the beneficiary incurs substantial expenses.
The general benefits of a trust
Just like your last will and testament, a trust can provide a way for you to determine now how and when your property will be distributed upon your death. However, unlike a last will and testament, a trust can also give you a way to protect those assets in situations where a particular beneficiary may need special assistance in managing that property. Another advantage is that a trust can help you avoid the time and expense of the probate process.
Download our FREE estate planning worksheet! If you have questions regarding a spendthrift trust, or any other estate planning needs, please contact The Vermillion Law Firm, LLC for a consultation either online or by calling us toll-free at (888) 567-5745.