A Trust for Spendthrift Beneficiaries

Most people establish estate plans to protect and preserve their assets for themselves and their loved ones. This, for the most part, means preventing their assets from being lost to creditors, lawsuits, taxes, and divorce. But sometimes, the real threat of loss comes from the very loved ones to whom they intend to pass their assets after they pass away.

Studies indicate that those who inherit wealth from others, tend to lose a great deal of that wealth, in a relatively short period of time, to frivolous spending, poor choices, bad investments, divorce, and creditors. If you plan to leave money and assets to a loved one who is bad with managing money, you may want to consider setting up a Spendthrift Trust for them.

What is a Trust? 

A Trust is a legal arrangement whereby the Settlor (the person who creates the Trust), transfers ownership of his or her assets to another party known as the Trustee. The Trustee will then manage these assets according to the terms of the Trust Agreement, for the benefit of a third party called the Beneficiary.

A Trust can be created by the Settlor during his or her lifetime (a Living Trust), or by a provision in the Settlor’s Last Will &Testament once he or she passes away (a Testamentary Trust).

A Trust can also be revocable or irrevocable. A Revocable Trust is one that can be revoked by the Settlor at any time, while an Irrevocable Trust is one that, once created, cannot be revoked by the Settlor.

What Is A Spendthrift Trust?

A Spendthrift Trust is a Living Trust that restricts the Beneficiary’s ability to access the Trust assets, or transfer his or her interest in the Trust. Because the Beneficiary has no access to the Trust assets and cannot transfer his or her interest in the Trust, the Trust assets are beyond the reach of claims and lawsuits filed against the Beneficiary.

Though the Beneficiary does not have direct access to the assets held in a Spendthrift Trust, he or she can receive distributions from the Trust. These distributions can be structured as regular income payments from the Trust, or goods or services paid for by the Trustee. When and how distributions will be decided by the Trustee, in accordance with the terms of the Trust Agreement.

What Makes A Trust A Spendthrift Trust?

What makes a Trust a Spendthrift Trust is language contained in the Trust Agreement that indicates that the Settlor intended for the Trust to qualify as a lawfully permitted Spendthrift Trust. This is what is referred to as a Spendthrift Provision.

The Spendthrift Provision renders the Trust irrevocable, and prevents creditors from attaching the Trust assets or the Beneficiary’s interest in the Trust to satisfy judgments. Most states, however, prohibit an individual from adding a Spendthrift Provision to a Trust they created with themselves as the Beneficiary, for fear that the Trust may then be used to avoid valid creditor claims.

When Is A Spendthrift Trust Useful?

A Spendthrift Trust is useful when you want to leave your assets to a Beneficiary who you know or suspect cannot manage money responsibly, for any number of reasons. With a Spendthrift Trust, the Trustee will decide, in accordance with the terms of the Trust, when the Trust assets will be distributed to the beneficiary.

If you are establishing an estate plan and have concerns about whether the designated Beneficiary will be able to handle their inheritance responsibly, contact an experienced estate planning attorney to discuss creating a Spendthrift Trust to safeguard the assets you intend to pass on.

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