The Benefits of Using a Spendthrift Trust
Estate planning is important and should be taken care of right away. Yet, there are a lot of different options available to you such as a spendthrift trust. What is it exactly?
Find out more here about the benefits.
Introduction
There is a good chance that you want the wealth that you have acquired throughout your lifetime to be passed down to your children or other heirs. Planning for the end of life is something that needs to be done because death is inevitable – and keeping your family’s money safe is important.
As you begin to determine the best way to handle your estate planning, a spendthrift trust may prove to be beneficial.
What is a Spendthrift Trust?
A spendthrift trust is one that releases inheritance funds to heirs incrementally rather than all at one time. The reason for using this type of trust will vary for each person, but it is most commonly utilized to protect heirs from potentially bad spending habits and for protection from creditors.
Any asset that is placed in the trust remains in the trust’s name — and does not belong to the beneficiary, even after death. The only time assets will be considered as property of the beneficiary is after they have been disbursed from the trust and put in the beneficiaries possession.
Many people worry that the wealth they worked for will be spent too freely by their heirs, leaving them without and unable to care for themselves. Spendthrift trusts ensure that this won’t happen.
How Does a Spendthrift Trust Work?
As with other trusts, a spendthrift trust is a its own, separate legal entity. It has a grantor (which is the person who created the trust) and a trustee (the person appointed to oversee it and manage it). In a spendthrift trust, the trustee has the very important role of disbursing funds to beneficiaries per the directions of the trust.
Spendthrifts do not disperse the funds all at once upon your death. Rather, these funds get disbursed in increments. The idea is that it keeps your heirs from spending the money all at once. Let’s say, for instance, that your estate is worth $5 million. You can hand that $5 million estate over to your heirs at once in a normal trust. Or, you can use a spendthrift trust and have money disbursed regularly (often on a quarterly basis) so that it ensures they are taken care of — and protected from their own spending habits.
If you choose, you may set up a spendthrift trust throughout your lifetime and name yourself as the trustee, with a successor trustee named to take over upon your death. This type of spendthrift trust is called an inter vivos trust.
When is it Most Useful?
Anyone can choose to use a spendthrift trust, but they are most useful for those who have significant wealth to leave to a loved one but are concerned that the funds won’t be used wisely. For instance, it may be a great option for beneficiaries who:
- have debt, or often have creditors seeking payment.
- do not handle money well, often overspending or spending carelessly.
- is battling an addiction.
- lacks a bit of common sense when it comes to making sound investments and avoiding scams.
Though, it is important to remember every situation is different. A spendthrift trust is just one of many available trust options for your estate planning needs.
Benefits of a Spendthrift Trust
Although we have talked about the different benefits of using a spendthrift trust, it should be reiterated. These trusts are great options for the right situation – and can save heirs from themselves in the future. After all, mishandling financials can lead to great devastation.
A few benefits of spendthrift trusts are:
- Potentially bypass probate
- Helps protect against creditors
- Protects your estate from poor financial habits
- Provides incremental payments, rather than one lump sum payment.
Perhaps the biggest benefit of all is knowing that you won’t have to worry about your beneficiaries squandering your wealth – and then being left with nothing. Having peace of mind about the entire situation is priceless.
How to Create a Spendthrift Trust
Creating a spendthrift trust is not much different than creating any other type of trust. However, unlike other trusts, this one has a spendthrift provision that will guide the trustee on your wishes.
Seeking legal guidance is a great choice when it comes to creating a trust. You never want to leave any stone unturned and give issues a chance to arise after you pass on. Laws are constantly changing and court cases are setting precedence. In California, Carmack v. Reynolds case took some protections of spendthrift trusts away. So it is important that you have an attorney draw up your trust in the proper way to ensure protection. Without expertise handling the trust formation and paperwork, you are putting yourself – and your family’s future – at risk.
Some Important Notes About Spendthrift Trusts
We may have covered the basics, but there is still a lot to know about spendthrift trusts. While it may be best to consult with an attorney, below you will find a couple of key points to note.
- Spendthrift trusts can be either revocable or irrevocable. A revocable trust is one that can be modified while an irrevocable trust cannot. They each have their benefits and limitations, but it is important to know that you have options.
- Beneficiaries cannot change the terms or break the trust once it has been put in place. The terms set forth in the trust are to remain. Any contests must be brought before a judge.
Conclusion
If you are considering a trust for your assets and wonder if a spendthrift trust is right for you, it is important that you contact an attorney. A consultation will have you an opportunity to explain what you are looking for — and discover the best options that are available to you. If a spendthrift trust is the route you choose to take, your attorney will be able to get that taken care of for you.
Having a plan for your estate is important. And getting it in place can offer a sense of relief, allowing you to enjoy life now a little more freely. Talk to an attorney today to get started.
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