How Does a Spendthrift Trust Protect the Inheritance of a Beneficiary?

In estate planning, there are many types of trusts that achieve identified goals of the individual creating the estate plan. A spendthrift trust is a specific type of trust that is written to restrict or control a beneficiary’s access to the trust property, in order to protect the assets from being taken by creditors of the beneficiary, wasted, or otherwise squandered by the beneficiary. A spendthrift trust may be suitable in various situations where restrictions on access to trust property are necessary or desired. If you consider creating a spendthrift trust as part of your estate plan, seeking legal guidance from your estate planning attorney is essential.

When Is a Spendthrift Trust Beneficial?

A spendthrift trust may be a beneficial estate planning tool for a variety of situations in which control over trust distributions is desirable. Examples include:

• a minor beneficiary who lacks the maturity and knowledge to manage substantial financial assets;
• a financially irresponsible beneficiary, who likely will spend money recklessly, which may result in significant debt and creditor obligations or wasting assets;
• a beneficiary with a history of drug use, gambling, or other addictive conduct that typically leads to financial irresponsibility;
• a beneficiary who may need protection from lawsuits, divorces, or other situations in which outside parties seek to access trust property.

The protection provided by a spendthrift trust promotes long-term financial security of the trust beneficiary in these and similar circumstances.

How Does a Spendthrift Trust Work?

A spendthrift trust is established by the same basic procedure as other types of trusts. The legal basis for the trust is the trust document created by you and your lawyer. In the document, you designate a knowledgeable, responsible trustee to manage and administer the trust assets according to the terms you provide in the document.

The trust document details the terms under which the trustee distributes the trust assets to the named beneficiary. In the case of a spendthrift trust, it is these provisions that provide the trustee with the legal authority to restrict and control distribution to the beneficiary, to prevent waste or irresponsible use of trust distributions. The spendthrift provision clearly states that the beneficiary cannot encumber or transfer their interest in the trust, and that creditors cannot compel the trustee to make discretionary transfers.

The terms of a spendthrift trust shield trust assets from creditors, lawsuits, and other risks of depletion, by specifying how much the beneficiary receives and under what circumstances distributions are made. By limiting the beneficiary’s access to the trust assets, the trust terms safeguard the assets. Creditors (and others) cannot access the trust assets until they are distributed as required by the trust terms. However, there are specific laws that apply to spendthrift trusts that provide exceptions for certain legal obligations, such as child support, spousal support, and certain government claims.

For example, trustee distributions from a spendthrift trust may be limited only to purposes like the beneficiary’s education, healthcare needs, necessities like food, housing, and clothing, and any other needs the grantor identifies in the trust document. The restrictions ensure that the trust assets remain available for the beneficiary’s well-being over time and avoid the risk of irresponsible depletion by the beneficiary.

A spendthrift trust may be taxable, depending on various factors, such as the structure of the trust and estate, type of assets, and applicable tax laws. The trust may have an established duration stated as a term of years, or it may expire when the beneficiary reaches a certain age or dies. The terms of the trust document govern when the trust terminates and what happens to the trust property when distributions can no longer be made under the terms of the trust documents. Your estate planning lawyer addresses these and all the other critical issues that are relevant to creating a spendthrift trust.

In addition to the other advantages of this type of trust, a spendthrift trust that is properly established with help from a knowledgeable estate planning lawyer may avoid the probate process, which can maintain the privacy of financial information of the estate, reduce estate administration costs, and save time in settling the estate.

Should You Set Up a Spendthrift Trust?

While the goals of a spendthrift trust may seem appropriate for your estate plan, other considerations need to be taken into account in determining whether this type of trust is a good option for your estate plan. Depending on your circumstances, a spendthrift trust may not be the most suitable or only estate planning option to address your concerns about a beneficiary. This type of trust has both benefits and drawbacks, all of which should be taken into account before you make a decision about how to structure your estate plan, by discussing your options with your estate planning lawyer.

Your attorney helps you make the appropriate choices for your estate plan, based on your financial and personal situation, and your overall estate circumstances. Working with an experienced estate planning lawyer is extremely important if you wish to set up a spendthrift trust or other protections for a beneficiary as part of your estate plan.

Schedule a Free Consultation With an Experienced East Valley Estate Planning Attorney

At Peterson Law Offices, estate planning is a primary focus of our practice. If you would like to discuss a spendthrift trust or have other concerns relating to the structure of your estate plan, we can help you put an estate plan in place or update your existing plan to fully address your goals and circumstances.

We provide top-quality services at affordable prices and welcome inquiries from clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.