One of the most important reasons for setting up a trust as part of your estate plan is to protect your assets and preserve your legacy. Leaving behind a large estate can be worrisome to some whether those worries come from beneficiaries being subject to estate tax or your beneficiaries spending the proceeds of the estate too quickly without adequately planning for the future. Before determining if a spendthrift trust is right for you, let’s first discuss what a spendthrift trust is and how it operates.
A spendthrift trust is a trust that is designed to limit the beneficiaries’ access to the trust assets. The beneficiaries are unable to sell or give away the equitable interest in the trust property. Rather, a trustee is in control of managing the property. The trustee will release the funds incrementally. In this way, a spendthrift trust can protect against a beneficiary’s poor spending habits. Additionally, since the trust owns the assets, not the beneficiary, the trust assets or beneficiary’s inheritance is also protected from creditors. Therefore, spendthrift trusts can ensure that your loved ones will be taken care of after your passing without the risk of your legacy being squandered away.
A spendthrift trust, like all trusts, are separate legal entities. Rather than giving a beneficiary his or her inheritance all at once, a spendthrift trust disburses funds incrementally. When setting up a spendthrift trust, you have wide discretion in determining when and how much of the estate is distributed.
As the “grantor” of the trust, the person who creates the trust, you are also responsible for appointing a trustee. This is an important decision as this is the person who will be responsible for managing the trust. This person serves as the gatekeeper of the trust, the person who disperses funds per the provisions you decided upon when creating the spendthrift trust.
It is also possible to set up a spendthrift trust during your lifetime. This is what’s called an inter-vivos trust. You would act as the trustee during your lifetime, so you would have discretion of how much a beneficiary receives and when. However, you must be sure to name a successor trustee to take over when you pass.
If you want to ensure that your estate will take care of your beneficiaries long after you have passed, a spendthrift trust may be a great option for you. Spendthrift trusts can provide you with peace of mind if there’s any concern about future financial mismanagement. Additional benefits include your estate being able to bypass probate, your assets being protected from the beneficiary’s creditors, and your assets being able to be distributed incrementally as you so choose, rather than all at once.
If you’ve decided that a spendthrift trust is right for you and yours, then the process of setting up a spendthrift trust is quite similar to establishing other types of trusts. Spendthrift trusts simply also include a “spendthrift trust provision.” This provision essentially just states that the trust funds are not automatically transferred to the beneficiaries all at once upon the trust going into effect.