Spendthrift Trusts for Children

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What is a Spendthrift Trust?

A spendthrift trust is a type of trust that is overseen by a trustee, who may be a bank or a private lender. The trustee controls the how the assets are distributed to the beneficiary. 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”.

Why Might I Create a Spendthrift Trust for My Child?

If you have accumulated a fair amount of assets over your lifetime, you may 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 Are the Benefits of a Spendthrift Trust?

The most beneficial aspect of a spendthrift trust is that creditors of the beneficiary 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 controls the account. Spendthrift trusts can be an ideal way to ensure that the account is prudently managed.

Are There Any Limitations?

Most states do not allow individuals to create a spendthrift trust and name themselves as the sole beneficiary in attempts to prevent creditors from reaching the funds. These 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. 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, simply using the word “spendthrift” is generally sufficient under most state laws.

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. As such, it is a good idea to work closely with an experienced trusts and estates 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: 01-28-2014 03:02 PM PST

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