What Is a Spendthrift Trust?

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What Is a Spendthrift Trust?What Is a Spendthrift Trust?

Key Takeaways

  • A spendthrift trust protects assets for beneficiaries who may overspend or face creditors.
  • The trustee of a spendthrift trust controls withdrawals and follows trust rules to safeguard assets.
  • A spendthrift trust is useful for beneficiaries who struggle with money, creditor claims, divorce settlements, or legal claims.
  • Limitations of a spendthrift trust include ineffectiveness in cases like child support or other legal claims.
  • Setting up a spendthrift trust requires careful consideration of trustee selection, rules, and individual circumstances.

Not everyone is good at managing money, and life can bring challenging circumstances to even the most responsible people. If you're planning on leaving a legacy to support your loved ones, you might be looking for ways to help make sure it lasts for as long as possible. A spendthrift trust is one way to potentially help your loved ones manage their inheritance. Here's what to consider.

Spendthrift Trust Defined

A spendthrift trust (or asset protection trust) helps preserve assets for beneficiaries when there's a potential risk of running out of money quickly. These trusts can help protect beneficiaries from themselves if they're likely to overspend, and they may also protect them from external creditors.

The Role of the Trustee

A trustee controls withdrawals from a spendthrift trust. This creates an additional layer in between your beneficiaries and trust assets, instead of granting full access to the funds. The trustee must follow the rules of the trust and any applicable laws.

The trustee may have some influence over how much beneficiaries receive and when. Sometimes, trustees provide money directly to a beneficiary, who can spend it however they choose. In other cases, trustees make payments directly to third parties (paying college tuition or housing expenses on a beneficiary's behalf). Consider speaking with an estate planning attorney to determine what is possible, and what makes the most sense in your situation.

Situations When a Spendthrift Trust May Help

A spendthrift trust may be useful in several situations. Here are some examples.

The Beneficiary May Not Be Great at Managing Money

The classic example is when leaving money to a beneficiary who does not handle money well. They might be young, or have a substance abuse problem or a history of poor decision-making. In some cases, these people are overly kind and generous, making them vulnerable. With a trustee who oversees spending, you might be able to improve the chances of the funds in the trust lasting.

Creditors

If beneficiaries have significant assets, that money may be attractive to creditors. For example, if they are unable to pay off business or personal debts, creditors could go after their inheritance. A spendthrift provision limits or prevents creditor access to those funds. If the beneficiary is sued following a tragic event, the spendthrift trust might offer protection.

Divorce

When somebody inherits money and gets divorced, the ex-spouse may believe they're entitled to the inherited assets. That may or may not be the case, but an asset protection trust might help reduce the amount an ex-spouse can take.

Potential Limitations of a Spendthrift Trust

A spendthrift trust might not be effective in every situation. It's important to work with a legal expert who can help you navigate state laws, your individual circumstances and your goals. Be aware that these trusts might not offer protection when the beneficiary owes child support or is facing other legal claims.

The Bottom Line

A spendthrift trust can help to protect an inheritance. While these trusts have limitations, they may be useful if the beneficiary is prone to unsustainable spending that can quickly deplete the trust's funds.

Setting up a trust is logistically complicated, and doing so also requires asking difficult questions. For example, what rules should the trustee follow, how much judgment should the trustee have and who should serve as trustee?

To learn more about the implications of asset protection strategies, consider talking with an estate planning attorney who's licensed to practice law in your state. A legal expert can discuss your goals and what may be possible with your state's rules, your assets and your beneficiaries, as well as any other follow-up questions you have about what a spendthrift trust is.

   A spendthrift trust helps ensure that assets are preserved and managed for your beneficiary. Start Your Free Plan  

 

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