Trusts are simply agreements that are characterized by trust and confidence between the trustee and the grantor (or the person creating the trust). The trust agreement gives authority to the trustee to administer the trust assets and distribute them to the named beneficiaries according to the provisions of the trust. A spendthrift trust is just a particular type of trust that you can consider including in your overall estate plan.
Similar to your last will and testament, a trust provides a way for you to decide now how and when your property should be distributed after your death. On the other hand, unlike your last will and testament, a trust can also provide a way to protect those assets in cases where a particular beneficiary may need special assistance in managing that property. That is where a spendthrift trust can be very useful.
A spendthrift trust is one that provides control over the trust assets by limiting the beneficiary’s access to those assets. These restrictions are primarily included for the benefit of heirs who have the potential of squandering that property. A spendthrift trust can also protect the assets from the beneficiary’s creditors, if that is a concern.
Essentially spendthrift trusts place restrictions on the access given to a beneficiary with respect to the trust principal. In most cases, the beneficiary is not allowed to access the principal, nor can they promise the assets to a third party. Put another way, if a beneficiary is unable to access the funds in the trust those funds cannot become subject to their creditors' claims either.
Since the beneficiary of a spendthrift trust is not allowed to have direct access to the trust assets, their benefits can only be received through the appointed trustee. This can be accomplished through a regular payment from the trust, or through goods or services bought by the trustee for the beneficiary.
Spendthrift trusts are generally considered when the grantor needs to leave cash or other property to a beneficiary about whom they are concerned may not be efficient at managing that money or property. Some reasons certain people need to ensure more control might include situations where the beneficiary is not particularly good with money or is prone to becoming indebted to multiple creditors. The beneficiary could also be an addict, making them more susceptible to squandering the money or property in order to satisfy that addiction. Beneficiaries who are easily defrauded or deceived are often more in need of the protection a spendthrift trust can provide.
The first thing you should think about when considering whether to create a spendthrift trust is whether you need to consult an attorney. Estate planning attorneys are very useful in helping to create specific types of trusts because they understand the terms that must be included to make those trusts work the way you need them to. After interviewing you to determine what you are looking to accomplish, your attorney can help you determine whether a spendthrift trust is what you actually need.
It is also a good idea to consider when and how you want the trust to terminate. You should also decide what should happen to the trust principal in case the beneficiary’s circumstances change. For example, if the beneficiary dies or becomes capable of managing the trust funds, then there may no longer be a need for the trust. Another consideration is whether you want to include provisions that allow for special payouts in the event the beneficiaries incur substantial expenses.
After you create the trust agreement, the next step that must be taken is to actually fund the trust. The concept of funding a trust is basically a matter of transferring ownership of the trust property into the name of the trust. What that means is, you can move cash in a bank account to a new account in the name of the trust. It also means naming the trust as a beneficiary of life insurance policies and annuities. If you have real estate, you can create a deed transferring that real property to the trust.
If you have questions regarding spendthrift trusts, or any other estate planning issues, please contact Anderson, Dorn & Rader, Ltd. for a consultation, either online or by calling us at (775) 823-9455.