Spendthrift Trusts for Children

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 What Is a Trust? What Is a Spendthrift Trust?

A trust is a legal instrument used in estate planning to avoid probate while benefiting a specific beneficiary or group of beneficiaries. This legal device allows the property owner to transfer that property or manage it on behalf of someone else, known as the trustee.

Trust laws differ from state to state, but in general, trusts are an efficient way to transfer assets that can be controlled and managed by the owner. An example would be placing clear conditions on the trust property, which must be met before the property is transferred.

Creating a trust requires:

  1. A trust settlor, or creator;
  2. The settlor delivering the legal title to the property;
  3. The property is delivered to a trustee;
  4. The trustee holds legal title to the property;
  5. The legal title is to be held for the benefit of one or more trust beneficiaries;
  6. The intent to create a trust;
  7. The intent to create a trust must be for a lawful purpose; and
  8. The document embodying the trust must be validly executed.

A spendthrift trust is a trust managed by a trustee such as a bank or a private lender. The trustee manages how the assets are to be allocated to the beneficiary. This beneficiary is typically not permitted to spend the money in the trust before actually obtaining distributions from the trust fund. The beneficiary in such an arrangement may be referred to as the “spendthrift.”

If you are concerned about how your acquired assets will be distributed or managed, you may wish to create a spendthrift trust for your younger child. A spendthrift trust may be a suitable 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 another person’s needs while simultaneously preventing that beneficiary from accessing the trust property. They are generally created for younger, more inexperienced beneficiaries such as a minor child of the trust’s founder. In most spendthrift arrangements, the beneficiary will not access the funds until a precise amount of time, typically their eighteenth birthday. However, the accessible date for the funds may also be up to the trustee’s discretion.

When Is a Spendthrift Trust Useful?

Spendthrift trusts are most valuable when the grantor wants to leave money or property to a beneficiary but worry that the gift might be squandered if the beneficiary has control of it. There are various reasons why a grantor might not trust an heir with the responsibility of controlling their trust funds.

For instance, the beneficiary might be (or the grantor might believe that the beneficiary is):

  • Not good with money
  • Has an addiction that could cause them to squander the funds
  • Might be easily misled or cheated, or
  • Might easily fall into debt with creditors.

In any of these cases, a spendthrift trust allows the trustee to provide for the beneficiary from the trust without worrying that the trust principal will be wasted by mishandling, drugs, gambling, a misguided relationship, or extreme debt.

What Is the Role of the Trustee?

The trustee plays a key role in administering a special needs trust. The terms of the trust put the trustee in control of the trust property and any benefit the beneficiary receives. The terms of the trust should convey the trustee’s authority in detail. And there is a wide range of possibilities. For instance, the trustee may be directed to make set payments to the beneficiary every month. The trustee may be given the authority to determine how much money the trustee should receive. When making a spendthrift trust, a grantor must evaluate how much control to give to the trustee.

Should the trustee make cash payments to the trustee? Or should the trustee choose to buy the beneficiary goods and services for the beneficiary?

If payments are to be made, how often should they occur? How should the amount of the payments be determined? As a set amount, a percentage of the principal, or perhaps a percentage of the trust income? Should the trustee have the power not to make payments at all? If so, under what circumstances should the trustee withhold payment — if the beneficiary gambles, gets into debt, or gets into a suspicious relationship?

What Are the Advantages of a Spendthrift Trust? Are There Any Restrictions on This Type of Trust?

Spendthrift trusts shield the beneficiary from themselves by protecting them from their debts or creditors. The objective of a spendthrift trust is to stop the spendthrift from wasting the trust property through mismanagement or overspending. This is likely the most valuable aspect of a spendthrift trust. Creditors of the beneficiary may not reach the funds in trust until the money or trust property is assigned to the hands of the beneficiary. As such, creditors may only collect on funds previously distributed to the spendthrift.

As previously discussed, the other advantage to a spendthrift trust is that younger or inexperienced beneficiaries are discouraged 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, not the spendthrift, a spendthrift trust may be ideal to ensure that the trust account is carefully managed.

There are some limitations regarding spendthrift trusts. Most states do not allow people to form a spendthrift trust and then name themselves as the sole beneficiary. This may be done to prevent creditors from having access to those funds. The trusts are called self-settled trusts and are forbidden if they only aim to evade creditors. However, there are a few states which do permit such spendthrift trusts. These allowances are made under limited circumstances.

What Are Some Common Disputes Over Spendthrift Trusts?

Spendthrift trusts are formed much the same as most other general trusts. What sets it apart is the inclusion of a spendthrift clause, which must clearly show 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 a spendthrift trust.

This can lead to a dispute over whether the trust in question is a spendthrift or some other type. Nevertheless, simply using the term “spendthrift” in the clause is generally sufficient under most state laws.

Another common dispute arises when the beneficiary expects to assert their right to collect a distribution before the proper time. Courts will normally abide by what is written in the trust with few exceptions. Further, conflicts may emerge when the trustee fails to perform their trustee duties. This could result in the replacement of the trustee with another, as decided by the testator or the court.

Finally, disputes amongst beneficiaries are typical. An example of this will be if one beneficiary feels entitled to a certain asset or distribution, as opposed to another person. Court intervention may be required to determine how the trust should be distributed.

Do I Need an Attorney for Spendthrift Trusts for Children?

A professional and knowledgeable trust lawyer can notify you of your state’s laws regarding trusts. They can help you determine if a spendthrift trust is right for you and your beneficiaries.

Forming a spendthrift trust can be a complex process, and an experienced lawyer will be able to guide you through the process while ensuring all of your needs are met. Finally, an attorney may draft any necessary legal documents and help you formulate the distribution of the spendthrift trust assets.

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