One of the main objectives of estate planning is the protection and preservation of your legacy. By placing mechanisms to keep your property and assets intact, you’re making sure that you can pass on as much as possible to loved ones. However, leaving behind a large inheritance can be worrisome. You might be wondering how you can leave an inheritance while preventing your loved ones from depleting it right away. If this resonates, consider setting up a spendthrift trust. They serve as a powerful tool that can protect your loved ones from temptation and poor financial decisions.
What is a Spendthrift Trust?
A spendthrift trust is a type of trust that limits your beneficiary’s access to assets. Instead of receiving their inheritance all at once, the funds are released incrementally. It serves as a protection mechanism against bad spending habits, as well as creditors.
Assets held in a trust belong to the trust, not to the beneficiary. If a beneficiary got into some financial trouble, their creditors cannot come after any inheritance that’s still held in the trust.
Spendthrift trusts are a powerful tool for those who want to make sure that their loved one will be taken care of, without the risk of having the inheritance squandered right away. The next section will break down how a spendthrift trust works.
How Does a Spendthrift Trust Work?
A spendthrift trust is a separate legal entity. Instead of bequeathing an inheritance to your beneficiary all at once, the trust disburses funds to them incrementally. For example, let’s say you have an estate worth $2 million. Instead of gifting the estate in its entirety at once, a spendthrift provision could arrange to disperse any dividends earned on a quarterly basis.
As the ‘grantor,’ or the person who created the trust, you must appoint a trustee. The trustee is the appointed individual who is responsible for managing the trust. This is an important role because the trustee serves as the gatekeeper, making sure to disperse funds to your beneficiary per the spendthrift provisions that you made.
You can also establish a spendthrift trust during your lifetime if you wish to do so. This is called an inter vivos trust, of which you can appoint yourself the trustee. If you go this route, just be sure to name a successor trustee who will take over upon your passing.
Benefits of a Spendthrift Trust
Spendthrift trusts are a great choice for grantors who want to ensure that their estate will benefit their loved ones long-term. They provide great peace of mind for when there’s worry about potential financial mismanagement. This peace of mind comes from the benefits that a spendthrift trust has to offer:
Protects your estate from negligent spending habits
Distributes assets incrementally, instead of at once
Protects assets from your beneficiary’s creditors
Bypasses probate (if established during your lifetime)
Commonly Asked Questions About Spendthrift Trusts
Is a Spendthrift Trust Irrevocable?
A spendthrift trust can be irrevocable or revocable. A revocable trust can be modified, whereas an irrevocable trust cannot. Although some grantors might prefer the flexibility of a revocable trust, irrevocable trusts offer more protection against taxes and probate. Spendthrift trusts are overseen and managed by a trustee. The grantor can appoint themselves as the trustee if they establish the trust during their lifetime, but they must make sure to appoint a trustee to take over upon their passing.
Can a Spendthrift Trust Be Broken?
In general, a beneficiary cannot change the nature of any trust. A trust with a spendthrift trust cannot be broken, which is a protection mechanism in itself. A trust with a spendthrift clause is specifically designed to protect the beneficiary against themselves, as well as their creditors. They cannot transfer the assets held by a trust into their own possession, and can only control assets that were distributed to them.
A grantor can likely modify the spendthrift trust if they established it during their lifetime, and structured it as a revocable trust. It’s helpful to keep in mind that generally, trusts are legally binding and are not designed to be broken. Any contests must be taken to the courts.
Spendthrift Trust vs Discretionary Trust - What’s the Difference?
When discerning the difference between a spendthrift trust vs. discretionary trust, it’s helpful to look at the level of control. The trustee of a spendthrift trust has to make disbursements that comply with the provisions of the trust. In other words, the trustee has very little control.
A discretionary trust does provide the trustee with some control over funds. They get to decide how and when funds can be distributed to the beneficiaries. They can also choose to withhold funds if the beneficiary has violated an agreement, or gets in trouble with creditors.
What is a Spendthrift Provision in a Trust?
You might be wondering, “what is a spendthrift provision in a trust?” A spendthrift provision is what makes a trust a spendthrift trust. When establishing a trust, you include a provision that dictates a beneficiary’s right to transfer funds into their possession. By including a clause stating that they may not transfer funds at once and are to receive disbursements incrementally, you are thus including spendthrift provision.
How to Set Up a Spendthrift Trust
The process of setting up a spendthrift trust is the same as establishing any other type of trust. If you’re unfamiliar with different types of trusts, be sure to visit our in-depth guide.
You might consider this powerful option if you want to gift your estate to a loved one, but the idea of them inheriting your estate all at once keeps you up at night. Again, this is entirely valid. Not everyone can practice financial self-discipline, especially when receiving a lump sum at once. Although your loved one might not necessarily feel excited about the idea, all you’re doing is protecting them long-term.
After doing some research and you decide that a spendthrift trust is the best fit for your family, all you have to do is set up a trust. Upon doing so, you just need to make sure to include a spendthrift provision.
Setting up a trust doesn’t have to be difficult! You can set up a trust today through our platform. Trust & Will makes estate planning easy, accessible, and affordable for anyone. We do so by guiding you through an otherwise unfamiliar process, step-by-step. By setting up a Trust today, you can rest easy knowing that your loved ones will have a layer of protection should anything unexpected happen.
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