A trust is a legal instrument used in estate planning to avoid probate, while providing a benefit for a specific beneficiary or group of beneficiaries. This legal device allows the owner of property to transfer that property, or managed on behalf of someone else, known as the trustee.
Trust laws vary from state to state but in general, trusts are an efficient way to transfer assets in a way that can be controlled and managed by the owner. An example of this would be placing specific conditions on the trust property, which must be met before the property is actually transferred.
Creating a trust generally requires:
- A trust settlor, or creator;
- The settlor delivering legal title to the property;
- The property is delivered to a trustee;
- The trustee holds legal title to the property;
- The legal title is to be held for the benefit of one or more trust beneficiaries;
- The intent to create a trust;
- The intent to create a trust must be for a lawful purpose; and
- The document embodying the trust must be validly executed.
A spendthrift trust is a type of trust overseen by a trustee such as a bank, or a private lender. The trustee is in control over how the assets are to be distributed to the beneficiary. This beneficiary is generally not allowed to spend the money in the trust before actually receiving distributions from the trust fund. The beneficiary in such an arrangement may be referred to as the “spendthrift”.
You may wish to create a spendthrift trust for your younger child if you are concerned about how your acquired assets will be distributed or managed. A spendthrift trust may be a practical option for those who have accumulated a fair amount of assets and would like to pass those assets on to heirs such as children or grandchildren.
Simply put, a spendthrift trust is a type of trust created to provide for the needs of another person while simultaneously preventing that beneficiary from accessing the trust property. They are typically designed for younger, more inexperienced beneficiaries such as a minor child of the trust’s creator. In most spendthrift arrangements, the beneficiary will not be able to access the funds until a specific amount of time, generally their eighteenth birthday. However, the accessible date for the funds may also be up to the discretion of the trustee.
What Are the Benefits of a Spendthrift Trust? Are There Any Limitations on This Type of Trust?
Spendthrift trusts protect the beneficiary from themselves by shielding the beneficiary from their debts or creditors. The purpose of a spendthrift trust is to prevent the spendthrift from wasting the trust property through mismanagement, or overspending. This is likely the most beneficial aspect of a spendthrift trust. Creditors of the beneficiary may not reach the funds in trust, until the money or trust property is actually transferred to the hands of the beneficiary. As such, creditors may only collect on funds that have previously been dispersed to the spendthrift.
As previously discussed, the other benefit to a spendthrift trust is that younger or inexperienced beneficiaries are prevented from mismanaging the trust account. Some common examples of mismanagement include prematurely selling or vesting away the funds contained in the trust. Because the trustee controls the account, and not the spendthrift, a spendthrift trust may be an ideal way to ensure that the trust account is carefully managed.
There are some limitations in regards to spendthrift trusts. Most states do not allow individuals to create a spendthrift trust then name themselves as the sole beneficiary. This may be done in an attempt to prevent creditors from having access to those funds. The trusts are referred to as self-settled trusts, and are prohibited if their only purpose is to evade creditors. However, there are a few states which do allow such spendthrift trusts. These allowances are made under limited circumstances.
What Are Some Common Disputes Over Spendthrift Trusts?
Spendthrift trusts are created much the same as most other general trusts. What sets it apart is the inclusion of a spendthrift clause, which must show in clear language that the trust’s creator intends the trust to be a spendthrift trust. Unless the trust documents include such a clause, courts may not legally consider the trust to be a spendthrift trust.
This can lead to a dispute over whether the trust in question is a spendthrift, or some other type. However, simply using the term “spendthrift” in the clause is typically sufficient under most state laws.
Another common dispute occurs when the beneficiary wishes to assert their right to collect a distribution before the proper time. Courts will generally abide by what is written in the trust with few exceptions. Additionally, disputes may arise when the trustee fails to perform their trustee duties. This could result in the replacement of the trustee with another, as decided by either the testator or the court.
Finally, disputes amongst beneficiaries are common. An example of this would be if one beneficiary feels that they are entitled to a certain asset or distribution, as opposed to another person. Court intervention may be required in order to determine how the trust should be distributed.
Do I Need an Attorney for Spendthrift Trusts for Children?
A skilled and knowledgeable estate attorney can inform you of your state’s laws regarding trusts. They can help you decide if a spendthrift trust is right for you and your beneficiaries.
Creating a spendthrift trust can be a complex process, and an experienced attorney will be able to guide you through the process while ensuring all of your needs are met. Finally, an attorney may prepare any necessary legal documents, as well as help you formulate the distribution of the spendthrift trust assets.