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Over the years I have had clients who wish to leave assets or money to a beneficiary who is either on disability or doesn’t have the wherewithal to manage his or her own finances.  If you want to leave money to someone, but are worried the beneficiary won’t use or spend the money wisely, one option available in estate planning is to prepare a spendthrift trust.  A spendthrift trust is a commonly used estate planning tool that provides financial support to an individual who may have difficulty managing their finances or who may face creditor claims in the future.

A spendthrift trust is a type of trust designed to protect the assets placed within it from creditors and possibly from the beneficiary’s own reckless spending habits. A trustee is named who manages and controls the trust assets for the benefit of the beneficiary.  It is important to note the beneficiary does not have direct control over the trust’s assets.  The trust gives the trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary with certain restrictions on how the money may be spent or distributed.   In simple terms, it’s a way to help protect the beneficiary if you believe they are not capable of handling the assets in one lump sum.  This is all done through a spendthrift clause, which is a provision in the trust document that prohibits the beneficiary from selling, transferring, or assigning their interest in the trust assets.

A spendthrift trust has many benefits and possible uses. The main purpose is to shield or hide, the trust assets from the claims of the beneficiary’s creditors.  That means the assets in the trust can’t be seized by creditors to satisfy those debts.

The trustee may also have the authority and discretion to manage and invest the trust assets and determine when and how much income to distribute to the beneficiary. This can help spread out and make the assets last for the long term. If large enough, the trust can provide a steady stream of income for the beneficiaries. Usually, if you have concerns about the beneficiary’s ability to handle money responsibly, the spendthrift option should be considered.

If you do decide to have a spendthrift trust prepared, the following questions will have to be answered: When do you want the trust to end?  Do you want any special payouts if the beneficiary encounters large expenses?  How much money do you want the beneficiary to receive each month?  Who do you want to be trustee and or successor trustee?

A supplemental needs trust is a type of spendthrift trust also used in estate planning.  In situations where a beneficiary has disabilities or special needs making them eligible for governmental benefits, a spendthrift trust can be used to provide for their supplemental needs without jeopardizing their eligibility for the benefits.  These trusts can also be called Special Needs Trusts.

Taxes. Who likes to pay taxes? For individuals with large estates, using a spendthrift trust can be part of an estate tax planning strategy to transfer assets to beneficiaries during the life of the grantor, while minimizing estate taxes.

It is important to note that spendthrift trusts are not foolproof. A beneficiary can always challenge the trust’s provisions in court.  Additionally, because the beneficiary must go to the trustee for funds and the trustee has control over the finances, the trust can set up the parties for conflict.  Finally, the trust can be expensive to maintain.  If you have to pay a trustee to handle the finances, the trustee has the right to charge an hourly rate for their time.

If you are thinking about engaging a lawyer to prepare your estate plan, it is important to consult with an experienced estate planning attorney.  We can help you understand the legal requirements and draft the trust document that aligns with your goals, and even help you select a qualified trustee to manage the assets.  We are a law practice that strives to serve you financially, personally, and professionally. Contact us today.