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How (and Why) to Use a Spendthrift Trust

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Spendthrift Trust

Leaving money behind for an heir can be nerve-racking, especially if they’re new to managing money or have trouble controlling their spending. An estate planning tool that can help you in this situation is a spendthrift trust, which affords a trustee the power to determine how their beneficiary can use inherited funds. If used correctly, this type of trust will allow your assets to last so they can provide for your loved ones for decades.

Trusts are complicated legal instruments, so it’s usually a good idea to work with an estate planning attorney to create one. You should also consider working with a financial advisor who can build a holistic financial plan and help you find an attorney to handle the estate planning elements of the plan. 

What Is a Spendthrift Trust?

A spendthrift trust is a trust in which the beneficiary doesn’t have direct access to the funds. Rather, one or more trustees are given broad discretionary powers to provide beneficiaries with funds for expenses to keep up their lifestyle. So, if the beneficiary is quite young or has shown signs of financial irresponsibility, you can still ensure that they’re taken care of without worrying that they’ll squander everything away.

The basics of who’s involved with a spendthrift trust are the same as any other type of trust. Here’s a breakdown of each:

  • Trustor/Grantor: The original owner of the assets within a trust.
  • Beneficiary: The person or people who receive the assets in the spendthrift trust.
  • Trustee: This is the individual who’s responsible for making sure that the trustor’s wishes are carried out according to their stated instructions. They also act as the physical medium between the trust and the beneficiary.

A crucial benefit of a spendthrift trust is that it allows you to protect the assets inside from any creditors that may have claims against the beneficiary. Since these funds technically belong to the trust rather than the beneficiary, creditors have no claim against them.

So, let’s say your beneficiary spends money that he or she doesn’t have for instance, by running up a big credit card bill. While they are still responsible for their debts, you can rest easy knowing that your assets will be protected. One thing to keep in mind: You can’t create a spendthrift trust and name yourself the beneficiary just to evade claims against yourself. Most states have laws against this action.

How to Create a Spendthrift Trust

Spendthrift Trust

The order of operations for creating a spendthrift trust is nearly identical to building any other trust. The main difference between these processes and a spendthrift trust is that you must include a specific spendthrift provision. This is the section in which you describe how the trustee will control the beneficiary’s access to your funds.

For example, you can stipulate in the spendthrift provision that the beneficiary’s access to the trust is restricted annually to a certain amount. Alternatively, you can mark down that your trustee has the authority to decide what this annual restriction will be. Another possible provision might include limiting what your beneficiary can spend the money on. In other words, it’s up to you, for the most part.

States have slightly differing rules about what you can and can’t stipulate in a spendthrift provision. Further, the exact language you use can sometimes be quite important. To ensure you’re following the rules, you may want to consult with an estate planning attorney who’s familiar with the laws in your state.

Who Should Utilize a Spendthrift Trust?

Spendthrift Trust

Anyone who wants to leave significant wealth to a loved one but has concerns about those funds lasting should consider a spendthrift trust. The peace of mind that this type of trust offers is priceless in the right situation.

Let’s say you have a healthy sum of money that you want to use to support a young grandchild. In this situation, a spendthrift trust could be much more useful than something like a savings account. Plus, because your grandchild is young, there’s no telling what kind of money habits they might develop. For these reasons, you may be uncomfortable creating a traditional trust for your assets, making it a perfect opportunity for a spendthrift trust. Take some time to pick a trustee that you deem to have sound judgement, especially in regards to managing finances.

Bottom Line

It’s a natural impulse to want to ease the lives of your loved ones, especially once you’ve left them. A spendthrift trust allows you to do just that, while maintaining some semblance of protection. The last thing you want is for the money you leave to disappear in a few years due to reckless spending or creditors. Under the right circumstances, a spendthrift trust provides an optimal combination of protection and freedom.

Tips for Planning Your Estate
  • A financial advisor could be a big help in building a financial plan that takes care of you and your family. Finding the right advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Many people choose to supplement their trust with a will. The process of formulating a will might seem daunting. But there are many online will creation services available to walk you through putting this all-important document together.

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The post How (and Why) to Use a Spendthrift Trust appeared first on SmartAsset Blog.

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