A trust is a written document that holds property (such as money) in reserve, or in “trust,’” according to the terms of the document. The trustor puts the assets into the trust fund, to later be distributed to the beneficiary of the trust. The trustor must name a third party to administer the trust according to its terms, until such time as the trust’s funds go fully to the beneficiary.
Sometimes, this is on a specific date; other times, the full distribution of the trust happens when certain conditions are met. Otherwise, funds are portioned out to the beneficiary in accordance with the terms of the trust document.
A spendthrift trust is much like the form of trust described above. It is, however, usually used in the case of certain types of beneficiaries. Often, the situation is that the trustor is a parent who has assets they want to pass onto to their child, who is either a minor, or, if fully grown, has given their parent cause for concern as to their responsibility with large sums of money.
Minor children often lack the experience to manage money wisely, so it is held in trust for them until they gain maturity. This might be when, for example, they reach the age of 25, or when they graduate from college. A trustor might also be wary of the beneficiary because they spend too much money, or have an addiction that might cause them to blow through the money.
By creating a spendthrift trust, the trustor prevents the beneficiary from spending the money all at once, because they can’t access the trust funds, or from going into debt which can be satisfied with assets from the trust, because creditors can’t reach the money held in trust, either.
What Are the Disputes That Are Common With a Spendthrift Trust?
Perhaps the most common legal dispute that arises over a spendthrift trust is one in which the beneficiary wants to collect all the funds in the trust before the time designated by the trust. For example, a 20 year old might try to assert their right to the funds, when the trust document says they must wait until the age of 25. When there is a written, binding legal document governing a situation, courts will usually abide by it. Although it is possible to make exceptions in some cases, this is somewhat rare.
It is also possible for there to be issues with the trustee. It is important to pick a very reliable, honest trustee to manage the trust. A dishonest trustee might abuse their position by spending the money in the trust for themselves, or otherwise mismanage the funds. This would certainly violate the trust documents, and necessitate the taking of legal action by the beneficiary. In a case like this, the trustee would likely be replaced, and also be required to replace the stolen funds.
Finally, there may be a dispute if there is more than one beneficiary. The multiple beneficiaries may fight over who is entitled to what portion of the funds held in trust. If the situation becomes too problematic, a court may have to intervene.
What is a Self-Settled Spendthrift Trust?
This is a trust in which the trustor, or person who creates the trust, is also the beneficiary of the trust. Not every state allows for the creation of a self-settled spendthrift trust. A trustee must still be appointed. The trustor, as the beneficiary, receives the funds back in accordance with the terms of the trust document.
Such a trust might be created in order for the trustor to protect their assets from creditors. Although the trustor can’t reach the funds while they are held in trust, their creditors also cannot access them to satisfy debts. The trustor is the only beneficiary in this type of trust, but it is still important to pick a trustee who is honest. A dispute may still arise between trustee and trustor/beneficiary.
What Debts Cannot Be Avoided With a Spendthrift Trust?
There are certain debts that cannot be avoided with the creation of a spendthrift trust. If the beneficiary owes money for alimony or child support, the trust will likely not protect them. The trust may also not be protected from claims by the government (such as for taxes).
Should I Work With An Attorney Regarding My Spendthrift Trust?
The creation of a trust can be very complex. It is important to draft the wording of the trust documents so that it meets all the wishes of the trustor, and there are many questions for the trustor to consider. A knowledgeable local attorney can ask the trustor the right questions, and create a trust instrument that will see the trustor’s wishes through. They can also advise in terms of choosing a trustee. Where there are large amounts of assets involved, it is wise to seek counsel from an attorney in the drafting of a trust. An estate lawyer can assist with all of these issues.