A trust can be used instead of (or in concert with) a Will to direct the distribution of your estate after you pass away and to provide for minor children and individuals with special needs. But a carefully drafted trust can also do much more.
A particular type of trust referred to as spendthrift trust can be used as a tool to protect a financially irresponsible beneficiary from squandering their inheritance as well as for asset protection for the settlor (the person who created the trust).
A trust is a legal contract between the settlor and the trustee (the person designated to manage the trust) whereby the settlor transfers legal ownership of assets to the trustee who manages those assets, according to the settlor’s instructions, for the benefit of a third party called the beneficiary. If drafted properly, a trust can enable you to achieve most, if not all, of your estate planning goals. Here's how:
- You select both the trustee and the beneficiary, and in some cases, you can be the beneficiary of the trust;
- You choose which asset you will transfer into the trust; and
- You provide the terms of the trust that dictate how the trust assets will be managed and distributed.
The bottom line—you dictate what happens to the assets in your trust, both during your lifetime and after you pass away.
Providing For Financially Irresponsible Beneficiaries
Studies indicate that those who receive an inheritance, typically lose 50% of it to overspending and bad investments. If you want to provide for a financially irresponsible loved one, you can consider setting up a spendthrift trust.
A spendthrift trust severely limits a beneficiary’s access to the trust principal. Essentially, a beneficiary cannot access the trust funds at will nor assign them to someone else. Instead of having direct access to the trust assets, the designated trustee makes distributions from the trust to the beneficiary.
How and when distributions from the trust will be made to the beneficiary will be determined by the settlor and outlined in the trust document. These distributions can be in the form of regular payments from the trust or goods and services purchased for the beneficiary by the trustee with trust funds.
A Spendthrift Trust for Asset Protection
Since the beneficiary of a spendthrift trust cannot readily access trust funds, his or her creditors cannot either. This means that a spendthrift trust can protect the assets in the trust from a beneficiary’s unsecured creditors. An example of an unsecured creditor is a judgment or lawsuit creditor.
Spendthrift trusts are actually designed for people whose professions expose them to liabilities. However, a spendthrift trust can be used by anyone who has assets that they are trying to protect from the claims of potential creditors.
Even though professionals usually have malpractice insurance, spendthrift trusts offer additional protection for amounts that are not covered by such insurance. Conversely, spendthrift trusts are not designed to protect people from mortgages or loans that are personally guaranteed or secured by other assets.
In some states, like Colorado, a settlor can create a spendthrift trust in which they are also the beneficiaries. This is referred to as a Domestic Asset Protection Trust (DAPT) and is most often used to place the settlor’s assets beyond the reach of his or her creditors.
Requirements for a Spendthrift Trust
For a spendthrift trust to function properly, it has to meet a variety of statutory requirements, most importantly:
- The trust must be irrevocable;
- The trust must not fraudulent;
- Distributions from the trust to the settlor can only be facilitated by someone other than the settlor; and
- There can be no commingling of trust funds with other outside funds.
A spendthrift trust must also satisfy many other requirements. But, if all requirements are satisfied, creditors will typically be unable to get to the assets in the trust.
The benefits that trusts provide make them the bedrock of estate planning and asset management. A simple Will is often incapable of addressing complex estate planning and asset protection needs.
A spendthrift trust is a very useful tool for both protecting a financially irresponsible beneficiary and protecting your assets, but it must be created with know-how and expertise and meet all statutory requirements. A poorly created spendthrift trust will compromise its strength and potentially expose the trust assets to your creditors.
Only an experienced estate planning attorney will have the ability to draft for you a spendthrift trust that can protect a beneficiary from their own irresponsible tendencies and safeguard your assets. For help drafting a spendthrift trust in Colorado, consult with an experienced Colorado estate planning attorney.
Have a business to worry about?
Probate is a court-supervised process for transferring assets after you pass away. Probate is usually necessary in Wyoming to transfer assets held by a decedent in his or her sole name at death worth more than $200,000. The process has several drawbacks primarily relating to delays, expenses and privacy. There exist several alternative techniques such as revocable trusts. Learn more about the probate process here.
A Power of Attorney is a legal document which allows someone to act for you. They quit being effective, though, when someone becomes incapacitated. In such cases a Durable Power of Attorney is needed. The Financial planning raises the concern of ensuring effective management of property and financial affairs after you become incapable of managing them. Durable Powers of Attorney provide a flexible and low-cost option for such situations. Lifetime financial planning tackles ensuring effective management of property and financial affairs after you become unable to do so.
Important events affecting a person's finances shouldn't be stopped because the person is unconscious or lacks the mental or physical capability of acting on his or her own. See inside for further information on Durable and Medical Power of Attorney forms.
Revocable Trusts are a popular tool and function as the foundation for most estate plans. ( Follow here for how Revocable and Irrevocable Trusts differ).
The term "living will" became a household word in 2005 due to events surrounding the acrimonious dispute in Florida over Terri Schiavo. Modern medicine makes such extraordinary situations possible and some may wish to place limits on medical care if they feel the burdens outweigh possible benefits. During such situations establishing a person's wishes is frequently impossible when that person loses the capacity to express themselves.
Despite all this, a majority of Americans have failed to provide their family members such guidance. This lack of guidance means family will have an unnecessarily difficult time predicting their loved ones' medical wishes. Completing an Advanced Directive ahead of time helps minimize undue stress during already trying times. Being healthy is no excuse not to begin this important process.
Medicaid planning stems from the understanding end-of-life and long-term health care can be prohibitively expensive for even middle class families. Medicaid is a joint federal-state program which provides means based assistance for those who qualify. Standards differ by state, but generally factor in the income and assets available to pay for medical expenses. There exist strategies for legally making assets inaccessible through the estate planning process. This is generally done via an irrevocable medicaid trust which is a type of Wyoming asset protection trust.
Do you have minor children? If so, then considering planning ahead. Find our guide to choosing and approaching a suitable guardian.
Estate Planning & LLCs
Your LLC is a valuable component of an overall estate plan. State and federal gift and estate tax exemptions are changing, and to keep your plan current an annual estate plan review is advisable. Learn more on our page about Wyoming LLCs.
Your LLC contemplates gifts of LLC units to other family members or to trusts that have been established for their benefit. If you did not sign an annual retainer agreement, make sure you contact your attorney and/or CPA to assist you in accomplishing and properly documenting annual gifts.
Periodically an appraisal of the assets in your LLC and valuation of the LLC itself is necessary. For gifts to be properly documented, appraisals of assets and valuations of LLC interests must be done at the time gifts are made. Updating must also be done in the event of the death of a member.
Don't Procrastinate On Estate Planing
Elder law is vitally important and we take this responsibility seriously. We have seen the damage caused by ignoring the many nuances and pitfalls which make elder law unique. We cannot sufficiently stress the importance of choosing a competent adviser to protect your interests. Following this vain, we are proud members of the Wyoming Elder Law Counsel. This distinction sets us apart from other elder law attorneys. Elderly law often requires advance planning due to legal waiting periods before tax strategies can be fully implemented. It is best to deal with the topic sooner, rather than later, so everything is in place when you, a family member, or other loved one passes away. Passing away without a will can lead to unnecessary anguish and taxes during an already difficult time. You should always consult an attorney when creating your estate plan.