Trusts make for a popular estate planning tool. They offer great protection for your assets, allow you to manage wealth, and set directives for how you want your property distributed to your loved ones. However, what if you feel concerned for your beneficiary and want to ensure that they’re supported long after you’re gone? Is a Trust still a good option? The answer is yes.
Keep reading to find out how spendthrift trusts are a great option if you want to protect your beneficiary as much as possible, along with other benefits. We’ll also explain how they differ from other types of trusts, so that you can choose the best option for you and your family.
Spendthrift Trust Definition
Here is a spendthrift trust definition so that we can then compare and contrast this unique type of trust from others.
A spendthrift trust is a specific type of trust that is designed to give the trustee a high level of control over how and when assets are distributed. Per the fiduciary agreement, they use their discretion to withhold and make distribution payments to the beneficiary, based on evolving circumstances. Due to this high level of discretion, appointing a trustworthy trustee is of utmost importance. (We outline everything you need to know about trustees here.)
Spendthrift trusts are often applied when the grantor of the trust (the person who created the trust) is worried about the beneficiary’s ability to manage their own funds. This could be due to mental illness, cognitive disability, or a general track record of reckless behavior. In these cases, the trustee will typically disperse modest amounts to the beneficiary. This is a strategy to help prevent them from spending down assets too quickly, or to fend off creditors and financial predators. The trustee may also pay for the beneficiary’s expenses directly out of the trust to minimize the amount of money provided to the beneficiary.
How does a spendthrift trust work? Head on over to our full spendthrift trust guide to learn more.
Spendthrift Trust vs. Living Trust
A living trust is essentially the same thing as a revocable trust, which is a trust that you establish during your lifetime. You can modify the trust until you pass away, after which the trust becomes irrevocable.
Spendthrift trusts can be either revocable or irrevocable, so it’s up to you to decide which option would be most appropriate. For example, let’s say you have an adult child who has developmental disabilities. You might choose to set up a living trust with a spendthrift clause to help give your child a sense of independence. This also gives you some flexibility in case you need to change the terms of the trust during your lifetime. Alternatively, you might choose to create an irrevocable spendthrift trust if you want to lock it in and are certain you won’t need to make any changes.
Spendthrift Trust vs. Discretionary Trust
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.
Spendthrift Trust vs. Special Needs Trust
While a spendthrift trust can benefit anyone, a special needs trust is used specifically for individuals who require assistance for disabilities. Assets are managed for the beneficiary’s benefit, in a way that doesn’t jeopardize any government benefits that they receive.
There are three types of special needs trusts: first-party trusts, third-party trusts, and pooled trusts. A first-party trust holds the assets owned by the individual with special needs. A third-party trust holds assets owned by those who want to support the individual with special needs. Last but not least, pooled trusts are unique in that they are typically sponsored by a nonprofit or government entity. Special needs beneficiaries pool their funds into a single trust for investment purposes, although they each get an individual account. Once a beneficiary passes away, any remaining funds are returned to the government or non-profit.
In essence, a spendthrift trust is traditionally used more for individuals who might have a pattern of struggling with financial or legal problems. In comparison, a special needs trust is designed specifically to support those with disabilities without disqualifying them from public assistance programs.
Spendthrift Trust vs. Asset Protection Trust
An asset protection trust (APT) is set up specifically to protect an individual from creditors, lawsuits, judgments, or divorce. In this case, the grantor of the trust is also often the beneficiary. The regulations surrounding asset protection trusts are complex, but when set up properly, they can offer a high level of protection.
An asset protection trust also includes a spendthrift clause, meaning that the beneficiary is not allowed to do anything with the assets unless the action meets the trust’s requirements.
However, it’s important to note that although an APT can include a spendthrift clause, it does not work the other way around. Spendthrift trusts can be both irrevocable or revocable, while an APT must be irrevocable. The key difference between the two types of trusts is intent. An APT is designed to protect a beneficiary’s assets in legal situations, while a spendthrift trust is designed to protect a beneficiary financially due to behavioral issues, disabilities, or mental illness.
Learn More About Types of Trusts
Spendthrift trusts are a great option if you have a loved one you want to support, but the idea of giving them access to property all at once keeps you up at night. Perhaps your beneficiary has a disability or a mental illness that would prevent them from being able to manage their own finances. Alternatively, perhaps your loved one has a habit of running into financial or legal problems. This type of trust can provide them with the support they need, while also helping ensure that the support lasts a long period of time.
Looking for something a little different? There are many different types of trusts, structured to fit every family’s unique circumstances. Check out our guide on 13 common types of trusts to start looking for the one that is the best option for your needs.
Navigating the differences, including advantages and disadvantages, between different trusts can be hard. Know that you don’t have to go through it alone! Trust & Will solves this problem by helping clients decide which option is right for your family, by having them answer a simple set of questions. Find out which type of trust is right for you today!
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