Spendthrift trusts: the key to leaving behind an inheritance without worries

If you are leaving money behind for heirs who are new to managing money, or have a hard time controlling their spending, you should look into spendthrift trusts. This article looks into what spendthrift trusts are, how to establish one, how they best operate, and who should get one.

What is a spendthrift trust?

A spendthrift trust is a unique type of trust that prevents your assets from being misused by allowing you to control when and how the assets can be accessed by the beneficiaries. Many types of trusts close following the death of the grantor and the distribution of their assets to beneficiaries, but a spendthrift trust continues to hold assets to accrue interest and for incremental distribution. If done right, the trust will help provide for your family for years.

A spendthrift trust is an irrevocable living trust, which means that it is established during the lifetime of the trustor, and cannot be modified by the trustor once established.

There are three parties involved in the trust - the trustor, trustee, and the beneficiary. The trustor creates and transfers assets into the trust. If you are planning to establish a spendthrift trust, you are the trustor.

The beneficiary is the one receiving benefits from the trust, either from the primary assets in the trust or the income generated by the assets.

The trustee acts as a middleman between the beneficiary and the trustor by making sure that the trustor’s instructions are followed.

The trustee plays a very important part in the spendthrift trust. They are given discretionary powers to choose when and why payments are made. Furthermore, they need to oversee the trust and make sure that directions are being followed on an ongoing basis from the trust’s establishment to its end. 

How to establish a spendthrift provision

The process in creating a spendthrift trust largely resembles that of other trusts. The only difference is that it should contain a “spendthrift provision.” In the provision, you need to stipulate how the trustee can control the beneficiaries’ access to the assets in the trust. Below are some examples of what you may include in the provision:

• You may allow beneficiaries to only receive the income or interest earned by the assets, but restrict them from gaining access to the primary assets in the trust.

• You may restrict the beneficiary’s access to the assets monthly or annually to a specified amount. You can choose this amount, or write in the provision that you give the trustee the power to decide. 

• You may also restrict what the beneficiaries spend the money on. 

The exact language you use in the provision is significant, so it may be wise to seek legal advice while drafting the provision. Additionally, states have different rules about what can be restricted through the provision, so it is necessary to make yourself aware of those restrictions. 

Who should establish a spendthrift trust?

Anyone who wants to leave a large amount of inheritance behind but is worried that the funds will not last long enough should consider establishing such a trust. It is also useful in situations where heirs are young or have shown signs of financial irresponsibility. In a spendthrift trust, the beneficiaries are unable to squander everything away because money will be meted out in portions over a long period. 

It is also beneficial when your heirs are married to someone who is “eyeing” the inheritance or has numerous creditors. If their spouse decides to divorce them, the assets in the trust are not split between the couple because the assets belong to the trust and not the beneficiaries. Similarly, creditors have no claim against the assets in the trust since the funds are not the property of the beneficiaries. Because of this advantage, some think about creating a spendthrift trust and making themselves the beneficiary to avoid creditor claims on their property. This practice, however, is outlawed in most states. 

If you are seriously thinking about establishing a Spendthrift trust and require additional assistance, please consult our concierge service here at Peacefully. The concierge service can help with referrals to trusted estate professionals, offering case-specific advice, recommendations, and coordination for you. For more about our concierge service or to schedule a free consultation, click here.

— Lucy Jung