A trust is a written document that holds property in reserve, or in “trust,'” according to the terms of the document. The trustor puts the assets into the trust fund, to later be allocated to the trust’s beneficiary. The trustor must name a third party to distribute the trust according to its terms until its funds go entirely to the beneficiary.
Sometimes, this is on a specific date; other times, the entire distribution of the trust occurs when specific conditions are met. Otherwise, funds are portioned out to the beneficiary following the trust document’s terms.
A spendthrift trust is much like the form of trust described above. It is, however, usually used in the case of specific types of beneficiaries. Often, the situation is that the trustor is a parent who has assets they want to pass on 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 they are held in trust until they gain maturity. This might be when, for instance, they reach the age of 25 or when they graduate from college.
A trustor might also be skeptical of the beneficiary because they spend too much money or have an addiction that might cause them to blow through the money. By forming a spendthrift trust, the trustor stops the beneficiary from spending the money all at once because they can’t access the trust funds or go into debt, which can be satisfied with assets from the trust. After all, creditors can’t reach the money held in trust, either.
What Is a Spendthrift Trust?
A spendthrift is a person who spends their money too fast and often squanders it. It appears that they make flawed financial decisions that affect their quality of life from the outside.
While it’s one thing to observe a person do that with money they made, it’s another to consider them doing it with your money. This is why many individuals with heirs who are spendthrifts decide to use trusts to guard that inheritance.
There are a few ways to do this, starting with a trust that pays out in increments over time. This may not stop foolish spending, but it can slow that spending down. Maybe you’re leaving someone $100,000. You believe they’ll spend it all in six months if you leave it to them. A trust that pays out $10,000 per year can at least extend that money out for ten years, raising the odds that they’ll have it when they need it for something significant.
Another way to shield your heir from their habits is by dictating what they can use the money for—worried that they’ll purchase a sports motorcar instead of paying to get schooling? Put the money into an educational trust that can only be used for tuition and related costs. Now you can leave them as much as you want without stressing that they’ll waste it.
What Are the Common Conflicts With a Spendthrift Trust?
Perhaps the most common legal dispute that arises over a spendthrift trust is when the beneficiary wants to accumulate all the funds in the trust before the time designated by the trust. For instance, 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 a written, binding legal document governs a situation, courts will usually abide by it. Although it is possible to make exceptions, this is somewhat rare.
It is also conceivable for there to be problems with the trustee. It is essential to pick a trustworthy, genuine trustee to manage the trust. A dishonest trustee might manipulate their position by spending the money in the trust for themselves or otherwise mismanaging the funds. This would 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 required to replace the stolen funds.
Finally, there may be a conflict if there is more than one beneficiary. The multiple beneficiaries may squabble over who is entitled to what portion of the funds held in trust. If the problem becomes too complex, a court may have to intercede.
What Is a Self-Settled Spendthrift Trust?
This is a trust in which the trustor, or individual who creates the trust, is also the trust’s beneficiary. Not every state permits the creation of a self-settled spendthrift trust. A trustee must still be selected. The trustor, as the beneficiary, receives the funds back under the terms of the trust document.
Such a trust might be created for the trustor to safeguard their assets from creditors. Although the trustor can’t reach the funds while held in trust, their creditors cannot access them to satisfy debts. The trustor is the only beneficiary in this trust, but it is still necessary to pick an honest trustee. A dispute may still arise between a trustee and the trustor/beneficiary.
What Debts Cannot Be Avoided With a Spendthrift Trust?
Certain debts cannot be avoided with the creation of a spendthrift trust. If the beneficiary owes alimony or child support money, the trust will likely not protect them. The trust may also not be protected from claims by the government (such as for taxes).
What Are the Professions Prone to Lawsuits?
Some individuals are professionals or may own a company exposed to lawsuits. If they were granted trust in a lump sum, that money would be vulnerable to any potential lawsuit. With a spendthrift trust, future funds are shielded from judgment – only the money paid to the beneficiary may be accessed.
Likewise, creditors cannot lay claim to the trust itself. Any money they can request must come from what the beneficiary possesses. They can go after the monthly/annual distribution, but they cannot touch the trust’s principal.
Spendthrift trusts may be either revocable or irrevocable and made alone or as part of a will. Although there are many aspects to consider, speaking to an experienced professional will assure you make the right judgments for you and your beneficiaries.
Will Your Beneficiary Resent the Restrictive Spirit of the Trust?
They undoubtedly might. However, you have the freedom to leave your capital and property to whomever you choose under the terms you deem best. They will still get the money, of course. But it won’t be squandered or reduced by collection actions of creditors. The funds also won’t be wiped out by civil judgments to defendants injured in drunk driving collisions caused by your beneficiary.
Don’t Kill Your Beneficiaries With Kindness
Leaving enormous sums of money to addicts and alcoholics without deterrents may set off chain reactions of problems. Those could even prove fatal to your heir or those he hits when driving drunk. You don’t want that.
Weighing all your estate planning options will help determine the best way to protect your loved ones and responsibly provide for their financial future when you are gone.
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 to meet all the trustor’s wishes, 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 to draft a trust. A trust lawyer can assist with all of these issues.