Although having enough money to establish a trust on behalf of your children, spouse, or other heirs can be a worthy goal to strive for, many people in this situation find themselves worried that their hard-earned money may be quickly squandered if it falls into the hands of an irresponsible loved one.
In other cases, you may worry that providing unlimited access to funds will trigger an heir's gambling addiction, alcoholism, or drug addiction, ultimately causing more harm than leaving your heirs no money at all.
Fortunately, there is a specific type of trust, often called a "spendthrift trust," that can protect your heir's assets from creditors, divorcing spouses, and sudden splurge purchases. Read on to learn more about the operation of a spendthrift trust and how this estate planning tool may be the perfect solution for all your fears.
What Is a Spendthrift Trust?
Trusts, generally speaking, are estate-planning tools that rely on a trustee to periodically distribute payments to various beneficiaries.
Trusts have a number of advantages for both those who create them (settlors) and beneficiaries, including more favorable tax treatment under income tax laws, the avoidance of probate, and usually the ability to bypass any estate taxes that might otherwise apply.
However, because most trusts permit beneficiaries to request withdrawals at any time, trusts can often be a dangerous tool for those who are vulnerable to deception, who don’t manage money well, or who have an expensive addiction.
Many settlors may worry that the first person to gain access to the inheritance will squander the money the settlors intended to be passed down for generations. Spendthrift trusts solve this problem by assigning the decision to disburse payments to the trustee, not the beneficiary.
The trustee has the ability to refuse any requests for disbursement of trust funds if they feel that this request isn't in the beneficiary's best interest, and may also decide to use trust assets to purchase items for the beneficiary (like a vehicle) instead of just handing over cash.
Because the beneficiary doesn't have the ability to request trust assets, this means that the trust principal can't be garnished by creditors (or the IRS) or considered a marital asset in a divorce.
These benefits make a spendthrift trust a valuable tool when you trust your loved one's ability to manage money but are concerned that they might become embroiled in a messy, high-stakes divorce in the future.
What Factors Should You Consider When Deciding to Establish a Spendthrift Trust?
The decision to create a spendthrift trust isn't a simple one.
Some of the things you'll want to consider when making this decision include: the amount you're hoping to use to fund the trust, your loved one's spending habits, your loved one's age, your loved one's debt, and your loved one's marital status and the perceived health of the marriage.
You'll also want to consider who you'd like to be the trustee. This trustee will have far more discretion than most, and administering a spendthrift trust can be a tough and sometimes full-time job.
You may decide to have a trusted family member or friend serve as trustee, with an attorney as a backup, or simply place this responsibility in the hands of a licensed attorney who can charge an hourly fee for trust administration services.
If you're considering the creation of a spendthrift trust, then it's important to seek the advice of an experienced attorney. Even seemingly simple trusts can become complicated, and a badly-written trust may generate years of expensive litigation. Getting these trust documents right the first time will always be money well spent.
Contact our team at Kisner Law Firm today to start drafting your trust or to learn more.