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What is a Spendthrift Trust?

Estate Planners | Monday, April 4th, 2011

It is natural to worry about what will become of your children or other heirs when you pass away. After all, you’ve worked hard your entire life and built up your wealth. And now that it is time to consider how your estate will be passed on to your heirs, you may have concerns about its distribution. Hopefully, your heirs are well-grounded, successful and established people who are responsible. Nonetheless, sometimes the opposite is true. That’s why some people choose a spendthrift trust when planning their estates.

The spendthrift trust is designed to not only benefit the beneficiaries of the trust, but to also protect the assets within the trust from the beneficiary’s creditors. A spendthrift trust is irrevocable. And although the word ‘spendthrift’ may appear to indicate that the beneficiary has a poor history with their finances or problems with excess spending, this may not always be true. In fact, most types of irrevocable trusts have a spendthrift clause. This is merely a measure that will protect the assets of the trust from the beneficiary’s creditors, including existing and future creditors, as well as to guard against any monetary judgments that might become attached to the trust at some point in time. Nonetheless, the spendthrift trust can and is often used to curb the poor spending habits of one or more beneficiaries of the trust.

Benefits of the Spendthrift Trust

The spendthrift trust is obviously a good choice when one’s heirs lack the ability to properly manage money or other assets. It can provide a lifetime of income or financial support. The way that the trust is set up, the beneficiary will be unable to sell, assign, transfer, or pledge any assets within the trust, so it will provide the person establishing the trust with the peace of mind that the beneficiary’s financial needs will be taken care of for as long as possible. In effect, it protects financially irresponsible beneficiaries from themselves.

When a spendthrift trust is drafted, you will need to name a trustee that will have the power to disburse assets within the trust to the beneficiary as the trustee sees fit, or you can create language within the trust that allows for a certain amount of money to be dispensed to the beneficiary at specific intervals of time. In general, a trust is not considered to be a spendthrift trust unless the trust instrument outlines the trust settler’s (person establishing the trust) intensions that the trust be treated as a spendthrift trust. It is also important to note that although the spendthrift trust can protect the beneficiary’s assets within the trust from most creditors, there are some types of creditors that can attach themselves to the trust in order to recoup monies owed by the beneficiary. For example, if the beneficiary owes alimony or child support, the spendthrift trust can be invaded in order to satisfy these financial obligations. In some instances, an outstanding debt to the Internal Revenue Service can be taken from trust assets, too.

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