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Spendthrift Trust Definition

Asset Protection Trust


A Spendthrift Trust, distinct from an Asset Protection Trust, is created by someone for the benefit of a loved one or obligated individual. It prevents beneficiaries from receiving their inheritance in a lump sum, especially if they have poor financial management skills. The Trust can vary in terms, such as trustee control, payment frequency, and the trustee's power to withhold payments.

This article is on the Spendthrift Trust, which should not be confused with an Asset Protection Trust.

The traditional Spendthrift Trust is formed by someone for the benefit of someone he or she loves or has a legal obligation to. The traditional Spendthrift Trust is not for the benefit of the person forming the Trust. Attorneys refer to this as a “third-party settled Spendthrift Trust.”

An Asset Protection Trust is established by someone for his or her benefit as a “Self-Settled, Spendthrift Trust.” This article will discuss the third-party settled and not the Self-Settled Spendthrift Trust.

Understanding Spendthrift Trusts

A Spendthrift Trust, historically, has been used to prevent Trust beneficiaries from receiving their inheritance in one lump sum, which allows them to blow the money in any way they see fit.

The Spendthrift Trust still encompasses this problem, but now encompasses a great deal more – at least in Wyoming.

A. The initial scenario addressed by a Spendthrift Trust involves a beneficiary who is bad with money. In this instance, you need a good trustee. The terms of the Trust put the trustee in control of the Trust property and must set out the trustee’s power in detail. In this, there is an entire range of possibilities.

For example, do you want to set payments to the beneficiary every month, every other month, quarterly, or for some other time?

Alternatively, do you want the trustee to decide how much if any, money your beneficiary will receive and when, if ever?

Do you want the trustee to make payments directly to the beneficiary or should the trustee make indirect payments to someone who then provides goods or services to the beneficiary?

Under what circumstances should the trustee withhold payment?

For example, does the beneficiary gamble, get into debt, or get into questionable relationships?

B. There are also scenarios where the beneficiary can and does manage well. Under Wyoming law, you can make the beneficiary the trustee of his or her own Spendthrift Trust. This allows the beneficiary to control his or her money without risking that property to an ex-spouse, creditors, or tax collectors.

Bottom Line

Concluding, in either one of these scenarios, the distribution is entirely at the discretion of the trustee, the beneficiary has no property right. This means that neither the beneficiary nor his or her spouse or children has any right under the law whatsoever to Trust property. More importantly, neither do creditors or tax collectors. It makes no difference who serves as trustee.

Are you considering a Spendthrift Trust? If you believe it might be suitable for you and want to gain more information, we recommend contacting an experienced estate planning attorney.