More likely than not, you are already familiar with trusts. They are agreements between a trustee and the person making the trust (the grantor) that is based on trust and confidence. In creating a trust, you must first draft a trust agreement that will provide the trustee with the authority needed to manage the trust assets and distribute them to the named beneficiaries. These actions are taken only in accordance with the terms of the trust document. A spendthrift trust is just a special type of trust. Our inheritance planning attorney will explain how it works.
What is a spendthrift trust?
A spendthrift trust is a trust that allows for great control over trust property by limiting the beneficiary’s access to the trust principal. In most cases, these restrictions can protect trust property from beneficiaries who have the potential of squandering that property. It can also protect the trust assets from the beneficiary’s creditors. Our inheritance planning attorney is very familiar with this type of trust and its benefits.
The primary purpose of spendthrift trusts
A spendthrift trust is usually created by grantors who are seeking to leave property to beneficiaries who have difficulty managing money. If you are afraid that your beneficiary may not use the property you leave them wisely, or will likely have issues with creditors, then a spendthrift trust can help to ensure the trust property is protected. No one wants the property to be squandered away by a beneficiary who can’t handle the responsibility alone.
Irrevocable trusts provide asset protection
For a spendthrift trust to be the most effective in protecting assets, it needs to be drafted as an irrevocable trust. The term “irrevocable” means that the terms of the trust cannot be changed once it has been executed. The reason an irrevocable trust can provide asset protection is that the property in it is no longer under your control once it has been transferred. Since the trust terms cannot be modified and the trust cannot be revoked, you essentially cannot get your property back. For that reason, the irrevocable trust property is no longer subject to any debts or legal claims against you.
Knowing the right terms to use 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 does a spendthrift trust work?
A spendthrift trust works by placing restrictions on a beneficiary’s access to the trust principal. Basically, beneficiaries are not allowed to access the principal themselves and they cannot promise the funds to a third party. Put another way, beneficiaries of spendthrift trusts are protected because their inheritances cannot become subject to claims of their creditors.
Access to trust funds can only be through the trustee
Since spendthrift beneficiaries do not have direct access to the assets in a spendthrift trust, they can only receive the benefits of the trust through the trustee. Trustees can make regular payments from the trust to a particular trustee or they can pay for goods and services for the benefit of the beneficiary. Either way, the trustee is in control.
Why spendthrift trusts are preferred over other types of trusts
As we stated before, spendthrift trusts are typically most useful in cases where the grantor wants to leave property to a beneficiary they believe will need assistance managing that property. This may be an issue when a beneficiary is not particularly savvy when it comes to managing their own finances. Some people are simply more prone to getting into debt with several creditors and need their assets to be protected from claims. In some more serious situations, a beneficiary may be an addict of some type, which could lead them to squander their money. Another concern may be for those who are susceptible to fraud or deception.
Important considerations in creating a spendthrift trust
First of all, it is important to seek the advice of an estate planning attorney who routinely handles spendthrift trusts. By asking specific questions about your goals, an estate planning attorney can help you create the perfect trust for your situation. Another important consideration is how and when you want the trust to be terminated, as well as, what needs to happen to the trust principal in the event of a change in your beneficiary’s circumstances. For example, you need to decide what will happen to the trust principal when your beneficiary passes away.
If you have questions regarding spendthrift trusts or any other inheritance or estate planning matters, please contact the experienced attorneys at the Cochrangersh Law Offices, P.S.C. for a consultation. You can contact us either online or by calling us at (502) 423-7023. We are here to help!
- Leaving Assets Can Be Tricky – Part 3 - October 15, 2020
- Leaving Assets Can Be Tricky – Part 2 - October 8, 2020
- Leaving Assets Can Be Tricky - October 1, 2020
