Spendthrift trusts may sound like you’re trying to keep your kids from frittering away your legacy, but they are not just for those with spending problems. They’re useful in cases of divorce, substance abuse, or where beneficiaries are young or financially inexperienced.
By: Jedediah McClure, JD
Key Points
- Spendthrift Trusts: Designed to protect heirs from mismanaging their inheritance due to immaturity, financial inexperience, or external pressures.
- Trustee Role: The trustee manages the trust and controls distributions to ensure the beneficiary’s needs are met responsibly.
- Asset Protection: Spendthrift trusts can protect assets from creditors, divorces, lawsuits, and poor financial decisions.
Important Definitions
- Spendthrift Trust: A trust that restricts the beneficiary’s access to the trust principal to protect it from being squandered or seized by creditors.
- Trustee: The person or institution responsible for managing the trust according to the terms set by the grantor.
- Grantor: The person who creates the trust and transfers assets into it.
Understanding Spendthrift Trusts
We all want what is best for our children. We work hard to provide for them while we are here on Earth, and the estate planning process ensures we continue to provide for them once we are gone. But, of course, it’s not always as simple as that.
If we are fortunate, we’ll be able to leave an inheritance, sizable or not, to our children. And even if our children are adults — barely over the age of 18, well into their 20s, or beyond – that doesn’t necessarily mean they should have easy access to any or all the money that is left for them.
The Risks of Unrestricted Inheritance
Adult children may not be ready to handle a significant inheritance due to a variety of reasons. They could be financially immature and unable to budget their money. They could be involved in an unhealthy relationship with little say or control over their financial matters. They could have addiction issues and be unable to cope. Or they could simply be too young. Providing a large sum of money to an heir in any of these scenarios could have disastrous results.
The truth is, many of us just aren’t equipped to deal with receiving a large sum of money all at once. Think of all the stories you’ve seen and read about lottery winners standing in front of the camera with their oversized checks, talking about how they are going to quit their jobs, travel the world, and buy homes for their family members. They’ll save some of the money, too, they say.
Their intentions may be good, but sadly, many of them end up going broke and filing for bankruptcy.
While your inheritance may not be equal to the Mega Millions, you still want to protect it so your beneficiaries don’t have the chance to blow right through it.
Enter the Spendthrift Trust
A spendthrift trust protects your heirs from themselves by providing a trustee with the authority to control how the beneficiary can use the funds. A trust becomes a spendthrift trust when the creator includes specific language indicating the trust qualifies as such, and by including limitations to the beneficiary’s control of the funds.
A spendthrift trust also protects assets from creditors because the assets are not owned directly by the beneficiary; a spendthrift trust is generally protected from divorces, lawsuits, and bankruptcies, and can keep money away from manipulative family members and friends, too.
Of course, once the money is paid out from the trust, that money is available to creditors just like any other assets owned by the beneficiary in his or her own name.
The Role of the Trustee
The trustee plays a critical role because they are in control of how and when the beneficiary receives money.
The grantor of the trust (that’s you) considers how much power to give the trustee. He or she can outline that the trustee is to make set payments to the beneficiary each month, regardless of circumstance, or that the trustee has the discretion to decide how much money the beneficiary will receive when and under what terms, if any.
For example, let’s say a grantor has given the trustee full control over the trust if the money is used for Jonny’s college tuition. The trustee can write a check for tuition payments each semester with no conditions whatsoever, or the trustee can put certain conditions on Jonny’s academic performance and pay his tuition if he maintains a certain GPA or graduates within a specific time frame.
For a different example, if the beneficiary has or had a substance abuse problem, the trustee can make access to the money contingent on a clean drug test. The trustee in this case will have to consider several factors, such as who will administer the drug test and how often the beneficiary must take it.
Although you can appoint anyone over the age of 18 to be the trustee of your spendthrift trust, you’ll want to carefully consider the person you choose to do the job. You can hire a professional firm, bank, or investment company to do it for a fee, or you could appoint a family member or friend.
Creating a Spendthrift Trust
An estate planning attorney will help you determine whether a spendthrift trust makes sense for you and your heirs. He or she will ask detailed questions to understand what you want to accomplish, who might be good candidates to administer the trust, and when and how you want the trust to end.
You will discuss other factors as well to ensure all bases are covered in the event of different scenarios playing out.
In the end, a spendthrift trust might be what you need to ensure your assets are protected and your family members are cared for.
Additional Information
- Regular Reviews: Regularly review the terms of the trust to ensure they continue to meet the needs of the beneficiaries.
- Tax Implications: Understand the tax implications of creating and maintaining a spendthrift trust. Consult with a tax advisor to navigate potential tax liabilities.
- Communication: Clearly communicate the existence and purpose of the trust to your heirs to avoid misunderstandings and disputes.
Frequently Asked Questions (FAQs)
Q: What is a spendthrift trust?
A: A spendthrift trust is a type of trust designed to protect a beneficiary from squandering their inheritance by restricting their access to the trust principal and controlling distributions through a trustee.
Q: Who can be a trustee of a spendthrift trust?
A: You can appoint anyone over the age of 18 to be the trustee, including a professional firm, bank, investment company, family member, or friend. It’s important to choose someone who can handle the responsibilities and maintain a good relationship with the beneficiary.
Q: How does a spendthrift trust protect against creditors?
A: Assets in a spendthrift trust are not owned directly by the beneficiary, which means they are generally protected from creditors, divorces, lawsuits, and bankruptcies until the money is distributed to the beneficiary.
Q: Can the terms of the spendthrift trust be changed?
A: The terms of a spendthrift trust can be flexible, depending on how it is drafted. However, any changes must comply with the legal framework of the trust and may require court approval or the consent of all interested parties.
Q: What happens if the trustee and beneficiary have conflicts?
A: Conflicts can arise between the trustee and beneficiary. To mitigate potential conflicts, choose a trustee who can maintain a good relationship with the beneficiary or consider appointing a neutral professional trustee.
Q: Are there any tax implications for a spendthrift trust?
A: Yes, there can be tax implications for both the trust and the beneficiaries. It’s essential to consult with a tax advisor to understand the potential tax liabilities and ensure compliance with tax laws.
Take Action Now
If you need assistance with creating a spendthrift trust or have questions about how to protect your heirs from financial mismanagement, contact me today. At Supernus Law, we specialize in creating comprehensive estate plans tailored to your unique needs. Schedule a consultation with me, Jedediah McClure, to discuss your estate and ensure your plans provide the support and protection your loved ones need.
Contact Information:
- Phone: (618) 354-0302
- Email: jed@supernuslaw.com
- Website: Supernus Law Website
Don’t let the fear of financial mismanagement prevent you from securing your legacy. Let’s work together to protect your assets and provide peace of mind for you and your family.
DISCLAIMER
This post is for informational purposes only and is not intended as legal advice. Please do not act or refrain from acting based on anything you read on this site. You should always seek competent legal counsel before taking any legal action. Using this site or communicating with the Supernus Business & Law Center, LLC through this site does not form an attorney/client relationship.
