A trust is essentially an agreement based on trust and confidence. The agreement is made between the person who creates the trust (the grantor) and the trustee who will manage the trust. The agreement itself will give the trustee the authority to manage the property in the trust and then distribute that property to the beneficiaries when the time comes. All transactions are to be conducted pursuant to the terms of the trust document. A spendthrift trust is just a specific type of trust. Here is what you need to know about the purpose of a spendthrift trust.
The definition of a spendthrift trust
The term “spendthrift” simply refers to the type of trust that allows you to control the trust property in a way that limits the beneficiary’s access to the principal property. There are some specific restrictions that can be included in the trust to protect the trust property, which is often necessary for beneficiaries who have the potential for squandering away the trust property. These restrictions can also protect the trust property from any creditors of the beneficiary.
The general advantages gained by using a trust
Similar to a last will and testament, a trust can give you the opportunity to stipulate how and when your property should be distributed upon your death. However, unlike your last will and testament though, a trust can also give you a way to protect those assets in cases where a certain beneficiary might need help in managing that property. Another important advantage is that a trust can help you avoid the time and expense of probate.
The basic purpose for using a spendthrift trust
In most cases, spendthrift trusts are used by those who need to leave property to a beneficiary about whom there is a concern as to whether they can manage that property wisely. If there is a concern that the beneficiary may have issues with creditors, a spendthrift trust may also be a wise choice. A spendthrift trust works because it prevents the beneficiary from wasting the property all at one time.
Which types of trusts provide the best protection for assets?
If you want your trust to be effective at protecting the trust assets, then the trust needs to be irrevocable. This means the trust cannot be modified once it has been executed. Having an irrevocable trust works because you can no longer control the property, which in turn means you cannot get the assets back. When you relinquish full control of the trust assets, then that property is no longer subject to any legal claims that may arise against you.
How to include the proper terms for asset protection
There are specific terms that need to be included in an irrevocable trust in order to ensure that it can effectively protect the assets you place in the trust. That means any interests you leave to your heirs must either be contingent on a specific condition or future event, or the interest needs to be subject to the complete discretion of the trustee.
Access to a spendthrift trust must only be available through the trustee
Since the beneficiaries of spendthrift trusts cannot have direct access to the trust property, they can only receive their benefits through the chosen trustee. Access to trust assets can be accomplished in the form of regular payments from the trust, or goods and services bought on behalf of the beneficiary by the trustee.
Some reasons spendthrift trusts are more often preferred
If you have a beneficiary whom you believe will have difficulty managing substantial property or cash, then a spendthrift trust will be the best option. For example, your intended beneficiary may not be good with money generally, or may be more likely to become indebted to several creditors. The beneficiary may be a drug addict or alcohol who is prone to squandering away cash to feed their addictions. Some beneficiaries, especially the young or the elderly, may be more easily defrauded or deceived by others, so they will need more protection than a regular trust might provide.
A few things to consider when creating a spendthrift trust
The first thing you may want to consider is consulting an estate planning or trust attorney before you create your spendthrift trust. An experienced attorney can help you create your spendthrift trust by asking thorough questions about your goals. That attorney can be very useful in helping you determine whether a spendthrift trust is the right choice for you and your beneficiary.
If you have questions regarding spendthrift trusts, or any other estate planning needs, please contact the Schomer Law Group for a consultation, either online or by calling us at (310) 337-7696.