As you do your estate planning, you may be at a point where you’re deciding how to provide for a loved one with poor spending habits. Whether it’s substance abuse or simply a lack of financial understanding, many families have that one person who doesn’t spend wisely.
If leaving an entire inheritance outright to a family member is concerning, consider using a spendthrift trust. This estate planning tool can offer support for your loved one while protecting and preserving your hard-earned assets.
What is a Spendthrift Trust?
A spendthrift trust is a special type of trust that limits the beneficiary’s access to trust funds. The goal of a spendthrift trust is to fund the maintenance of the beneficiary while protecting the trust assets from the beneficiary’s frivolous spending. With a valid spendthrift trust, the beneficiary cannot do the following:
- Access the trust funds until they are disbursed;
- Transfer their interest in the trust; or
- Borrow against the trust.
Furthermore, the beneficiary’s creditors cannot use trust assets to satisfy a debt until the funds are distributed to the beneficiary. A spendthrift trust essentially adds an extra layer of protection around the trust assets.
How Does a Spendthrift Trust Work?
With the help of an estate planning attorney, you can create a spendthrift trust that gives you peace of mind. The grantor is the person who creates the trust. They set up the trust by following these steps:
- Appointing a trustee to manage the trust funds;
- Designating a beneficiary;
- Including a spendthrift clause; and
- Transferring assets into the name of the trust.
The spendthrift provision will have language that prevents the beneficiary from assigning their interest in the trust and prohibits creditors from accessing any trust funds. A spendthrift trust will also include distribution instructions for the trustee that they must follow. Rather than the beneficiary receiving their inheritance all at once, the trustee can distribute funds incrementally and according to the trust’s terms.
The trust is a separate legal entity that owns all of the assets, not the beneficiary. As long as the assets remain in the trust, the creditors cannot attach an interest in them. However, as soon as the trustee distributes funds to the beneficiary, that money or asset is fair game to any creditors.
Spendthrift trusts can be a powerful estate planning tool. A spendthrift trust provides the following benefits:
- Protects your assets from irresponsible spending by the beneficiary;
- Distributes assets to the beneficiary incrementally rather than in one lump sum; and
- Protects trust assets from beneficiary’s creditors.
With a proper spendthrift trust, you can achieve your goal of supporting your loved one while still maintaining control over the trust funds.
Let the Attorneys at Church Church Hittle + Antrim Help with Your Estate Plan
When it comes to estate planning, who you give your assets to is just as important as how you give them. Leaving an inheritance outright to a loved one who lacks financial acumen may be detrimental. Let us create a solution for you that meets your needs and satisfies your goals. With over 140 years of legal experience, the estate planning attorneys at CCHA work hard to provide a unique, comprehensive estate plan for each client.
Contact us online or call one of our offices. We’re here to help you plan your legacy.
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