Spendthrift Trusts for Children
If you’ve accumulated a fair amount of assets over your lifetime, you’ll likely want to pass them on to your heirs such as your children or grandchildren. However, especially with younger children, you may be concerned about how the assets will be distributed and managed. In this situation, a spendthrift trust may be a practical option.
What is a Spendthrift Trust?
Basically, a spendthrift trust is a type of trust that is overseen by a trustee such as a bank or a private lender. The trustee controls the how the assets are distributed to the beneficiary after the trust creator has become deceased or incapacitated. The beneficiary is usually not allowed to spend the money before they actually receive distributions from the trust fund.
In a spendthrift trust, the beneficiary is sometimes referred to as the “spendthrift”. Spendthrift literally means a person who wastes away their financial estate through imprudent living or excessive spending. However, the beneficiary is not actually required to have a history of bad spending in order to be named in the spendthrift trust.
What are the Benefits of a Spendthrift Trust?
The most beneficial aspect of a spendthrift trust is that creditors may not reach the trust funds until the money or trust property is actually transferred to the hands of a beneficiary. In other words, creditors can only collect on funds that have already been dispersed to the beneficiary.
Also, spendthrift trusts prevent younger or inexperienced beneficiaries from mismanaging the trust account by prematurely selling or vesting away the funds. This is because the trustee and not the beneficiary essentially controls the account. Therefore spendthrift trusts can be an ideal way to ensure that the account is prudently managed.
So for example, suppose you left $10 million to your grandchild, and the spendthrift trust provided for a payments of $200K to be distributed on a yearly basis. This means that your grandchild would only be entitled to the yearly payments and cannot access the remaining funds.
Furthermore, if the grandchild incurs debt through overspending, creditors cannot reach the general trust funds and may only levy on the $200K payments after they have been distributed. The remaining undistributed portions of the trust funds will be protected as they continue to generate interest.
Are there any limitations?
Yes- most states do not allow persons from creating a spendthrift trust and naming themselves as the sole beneficiary in attempts to prevent creditors from reaching the funds.
Such trusts are called self-settled trusts and are prohibited if their only purpose is to frustrate or evade creditors. However, a handful of states do allow such spendthrift trusts under limited circumstances.
How do I create a spendthrift trust?
Spendthrift trusts are created in the same manner as most other general trusts. The defining characteristic is the inclusion of a spendthrift clause or spendthrift provision.
The spendthrift clause must show in clear language that the trust creator intends the trust to be a spendthrift trust.
Unless the trust documents include a spendthrift clause, courts may not legally consider the trust to be a spendthrift trust. However, it is very easy to satisfy the spendthrift clause requirement- simply using the word “spendthrift” is generally sufficient in under most state laws, and complex legal phrases are not required.
Do I need a lawyer to create a spendthrift trust?
Creating a spendthrift trust is an excellent way to place limits on the way trust funds are managed. However, they can be complex because they require a great deal of foresight and the ability to anticipate future costs and expenses.
Therefore it is always a good idea to work closely with an experienced estate planning lawyer who can help you draft the spendthrift trust. A lawyer will be able to help you prepare the necessary documents as well as assist you in formulating a workable distribution scheme for any heirs you wish to name as a beneficiary.
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Last Modified: 07-07-2010 03:38 PM PDT
