What is a Spendthrift Trust? And when should it be part of a Comprehensive Estate Plan?
Spendthrift trust provisions have always been an important part of a well-tailored estate plan but have taken on a resurgence in the past few years given the tremendous amount of wealth that will be passing from one generation to another in the next couple of decades. Further, the Millennial generation has taken on debt loads, due to higher tuition and other challenges, that have not been experienced in the past.
The legal definition of a spendthrift provision includes a provision that restrains either the voluntary or the involuntary transfer of a trust beneficiary’s interest. Said differently a spendthrift provision puts restrictions on the beneficiary’s access to trust principal. Essentially, the beneficiary cannot access the trust principal, or promise it to anyone else. Because the beneficiary cannot access trust funds, neither can his or her creditors.
A spendthrift provision is the surest way to ensure that your wealth stays in place to assist your children and other family members rather than being sent directly to creditors.
When is Spendthrift Trust Useful?
Spendthrift trust provisions are almost always recommended when the grantor (person creating the trust and passing on their wealth) has a beneficiary (person who will be receiving your wealth after you pass) who has one of the following situations:
Not good with money or managing their finances;
Has had trouble with debtors in the past or is easily deceived;
or has an addiction that could cause them to spend a lot of money in an unhealthy way.
It takes a lifetime to accumulate wealth which can unfortunately evaporate quickly if given to someone with a gambling, drug, challenged relationship, or other problem.
How is Spendthrift Trust Created and How is it Managed?
A spendthrift trust provision should be carefully created to best match the needs of the grantor and beneficiary. Included below is a general spendthrift clause that:
Spendthrift Provision: No beneficiary entitled to any form of future distribution from a trust created in this Agreement shall take or have any title in the Trust until it is received. Further, no disposition, charge, or encumbrance by way of anticipation by any beneficiary shall be valid or of any legal effect; nor shall the future interest of a beneficiary be in any way liable for any claim of a creditor (by state or federal law), spouse, divorced spouse, or any other claimant to whom a beneficiary may be in any way liable; nor shall it be subject to any legal process, execution, garnishment, or bankruptcy proceeding.
The gatekeeper who manages the spendthrift provision is the Trustee. The trustee is the person who controls the trust property according to the terms of the trust. The trustee, while important in all trust administration, takes on a special role when a spendthrift provision is included in the trust. The trustee, in some way’s steps in as the parent or guardian, for the spendthrift beneficiary and must access the beneficiary’s behavior to determine when or if to distribute funds. The grantor can help the trustee by making determines in advance such as:
Should the trustee have the power to not distribute funds and under what circumstances?
If payments should be made, in what form and frequency. For instance, as a set amount, a portion of the principle, or net income.
How to Make a Spendthrift Trust Provision?
If you have a spendthrift beneficiary, it is almost always recommended that you work with an experienced estate planning attorney. No two spendthrift challenges are the same and given the high stakes and complication, the piece of mind of having a well drafted spendthrift trust can be invaluable.
** This is not legal advice