A trust is a fiduciary arrangement, established by a grantor or trustmaker, which gives a third party (known as a trustee) the authority to manage assets on behalf of one or more persons (known as a beneficiaries). Since every situation is different, there are different types of trusts to ensure the best outcome for each beneficiary. 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. Generally, these trusts are 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 squandering of funds.
Spendthrift Trust Basics
Put simply, a spendthrift trust is for the benefit of someone who needs additional assistance managing or protecting his or her money.
The spendthrift trust gives an independent trustee 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. A knowledgeable estate planning attorney can provide guidance on how to best structure this provision, so it meets your family’s needs.
Like any trust, the benefits of a spendthrift trust can help avoid the delay and expense of probate as well as provide tax benefits and peace of mind. Of note, there are several states that limit a grantor from naming his or herself as a beneficiary under a spendthrift trust for the purposes of avoiding creditors.
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, call or contact us today to explore your options.