Could Your Heirs Benefit from the Protection of a Spendthrift Trust?

For many people, a trust is one of the foundational tools used when putting together their estate plan.

A trust is a fiduciary arrangement, established by a settlor or trustmaker, giving a third party, the trustee, the authority to manage assets on behalf of one or more persons known as beneficiaries. Everyone’s circumstances are different and there are different types of trusts to ensure the best outcome in each situation. One type of trust, known as a spendthrift trust, is commonly used to protect a beneficiary’s interest from creditors, a soon-to-be ex-spouse, or his or her own poor management of money. This type of trust can be created for the benefit of individuals who are not good with money, might easily fall into debt, may be easily defrauded or deceived, or have an addiction that may result in misuse of funds.

Spendthrift Trust Basics

The spendthrift trust gives an independent trustee (someone other than the beneficiary) complete control and authority to make decisions on how the funds in the trust may be spent and what payments to or for the benefit of the beneficiary are necessary according to the trust document. Under a spendthrift trust, the beneficiary is prohibited from spending the money before he or she actually receives distributions. These restrictions prevent the beneficiary from squandering their entire interest or having it garnished by the beneficiary’s creditors.  The trustee controls the assets in the trust, including managing and investing the funds, once the trust is made irrevocable. Most trusts become irrevocable after the grantor has passed, but some are irrevocable from the start.

Creating a Spendthrift Trust

A spendthrift trust is created essentially in the exact same manner as any other trust. However, the vital difference of a spendthrift trust is that the trust instrument must contain the right language to invoke the law’s protection. To obtain the strongest protection, this type of trust should be established by someone other than the person named as beneficiary, for example, a parent establishing the trust for their child. A knowledgeable estate planning attorney can provide guidance on how to best structure this provision, so it meets your family’s needs.

Like other types of trusts, the spendthrift trust can help avoid the delay and expense of probate while also providing tax benefits and peace of mind.

Estate Planning Help

Creating a spendthrift trust is invaluable because it can give you peace of mind that your loved ones will be taken care of after your passing. If you are considering creating a spendthrift trust, or have any other estate planning questions, contact us today to explore your options.