How a Spendthrift Trust Works There are situations when you want to care for your children in your will. However, you know they’d just blow their inheritance in just a few years. That’s when a spendthrift trust is useful. This type of trust has restrictions that protect immature heirs from both themselves and potential creditors.
US News’ recent article entitled “What Is a Spendthrift Trust?” explains the trust lets you leave funds to a beneficiary, without giving them full control over those funds. Instead, a trustee is given the authority to distribute funds for the benefit of a beneficiary.
This type of trust is created to protect a beneficiary from squandering the wealth bequeathed to them or was left to them.
Speak with an estate attorney and talk in detail about your concerns. Ask the attorney to draft this document for you.
The attorney can write into the trust certain rules, such as stipulating an heir may be required to reach a certain age before they start receiving payments, or that the heir receives installments at certain life stages.
If you have an heir or someone you want to leave an inheritance who is immature, irresponsible, or underage, a spendthrift trust can give you some control and power over how and when the money is spent.
A spendthrift trust can also try to limit access to the funds by creditors. The objective is to keep other people from accessing the funds set aside for the beneficiary.
It's the goal of the original trust creator to protect their beneficiary's assets from other people. This might be a creditor or even an ex-spouse.
Note that the laws regarding spendthrift trusts vary from state to state, so work with a local estate planning attorney.
The ability of a creditor to access assets in the trust will to depend on state law. Every state has different rules regarding their respect for the spendthrift trust.
One of the critical tasks in setting up a successful spendthrift trust is the person who is named as the trustee of the funds. That person can have some discretion when distributing the funds, so it needs to be an individual you can trust over the long term. That's why partnering with an experienced estate planning attorney who’s truly an expert in that field is so important.
Reference: US News (June 28, 2022) “What Is a Spendthrift Trust?”
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