Spendthrift Trusts

A spendthrift trust protects trust property from an irresponsible beneficiary and his or her creditors.

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A spendthrift trust is a type of property control trust that limits the beneficiary’s access to trust principal. This restriction protects trust property from:

  • a beneficiary who might squander trust property, and

  • the beneficiary’s creditors.

Spendthrift trusts are usually made by a grantor who wants to leave property to a beneficiary but is worried that the beneficiary won’t use the property wisely or that he or she might get into trouble with creditors. A spendthrift trust ensures that some trust property can be made available to the beneficiary, without the possibility that the beneficiary could squander it all at once.

Terminology:

  • Grantor – The person who transfers property into a trust, also called a “settlor.”
  • Beneficiary – The person who receives a benefit from the trust.
  • Trustee – The person who controls trust property according to the terms of the trust.
  • Trust principal – The property put into a trust, as opposed to the income created by the trust. 

How Does a Spendthrift Trust Work?

A spendthrift trust puts restrictions on the beneficiary’s access to trust principal.  Essentially, the beneficiary cannot access the trust principal, or promise it to anyone else.  Because the beneficiary cannot access trust funds, neither can his or her creditors.  

Instead of having direct access to trust property, the beneficiary receives benefit from the trust through the trustee named in the trust.  This benefit could be in the form of a regular payment from the trust, or in the form of goods or services bought for the beneficiary by the trustee. How and when the trustee makes payments to the beneficiary is determined by the terms of the trust.  See “The Role of the Trustee,” below.

After a payment is to the beneficiary, that money is available to creditors.

The distinguishing legal language for a spendthrift trust will be something like:  No part of the income or principal of this trust shall be subject to anticipation, alienation, or assignment by any beneficiary.

When is a Spendthrift Trust Useful?

Spendthrift trusts are most useful when the grantor wants to leave money or property to a beneficiary, but worries that the gift might be squandered if beneficiary has control of it.  There are a variety of reasons why a grantor might not trust a beneficiary with the responsibility of controlling his or her trust funds.  For example, the beneficiary might be (or the grantor might believe that the beneficiary is):

  • not good with money
  • has an addiction that could cause him or her to squander the funds
  • might be easily deceived or defrauded, or
  • might easily fall into debt with creditors.

In any of these situations, a spendthrift trust allows the trustee to provide for the beneficiary from the trust, without risking that the trust principal will be wasted by misuse, drugs, gambling, a misguided relationship, or excessive debt.

Role of the Trustee

The trustee plays a key role in the administration of a special needs trust.  The terms of the trust put the trustee in control of the trust property and of any benefit that the beneficiary receives.  The terms of the trust should describe the trustee’s power in detail.  And there is a wide range of possibilities.  For example, the trustee may be required to make set payments to the beneficiary every month, or the trustee may be given the power to decide how much money, if any, the trustee should receive. When making a spendthrift trust, a grantor must consider how much control to give to the trustee. 

  • Should the trustee make cash payments to the trustee? Or should the trustee have the discretion to buy the beneficiary goods and services for the beneficiary?
  • If payments are to be made, how often should they occur?  How should the amount of the payments be determined – as a set amount, a percentage of the principal, or maybe a percentage of the trust income?
  • Should the trustee have the power not make payments at all? 
  • If so, under what circumstances should the trustee withhold payment -- if the beneficiary gambles, gets into debt, or gets into a questionable relationship?

A spendthrift trust must be carefully crafted to reflect the unique circumstances of the grantor and beneficiary.  And the grantor must consider the burden that the trust will put onto the trustee.  Will the trust essentially make the trustee a babysitter for the beneficiary – having to assess the beneficiary’s behavior to determine whether the trustee can properly distribute funds to the beneficiary?  In the least, a spendthrift trust puts a significant burden on the trustee. At most, it could be a complicated and burdensome obligation.

The grantor can be the trustee of the trust or he or she can name someone else to do the job.  The grantor should also name a successor trustee who would take over when the grantor dies.  The beneficiary cannot be a trustee.

How to Make a Spendthrift Trust

Get help from a lawyer to craft a spendthrift trust. The lawyer will ask you detailed questions to make sure a spendthrift is right for you and to find out what you want to accomplish with the trust.  In addition to deciding what role you want the trustee to play (see above), you may also need to consider:

  • When and how do you want the trust to end?
  • What should happen to the trust principal if the beneficiary’s circumstances change, for example if the beneficiary dies or acquires the ability to manage trust funds.
  • Do you want to allow for special payouts if the beneficiary encounters large expenses, such as a long illness or enrollment in college?

If all of this sounds complicated, it can be.  Ask your lawyer for help figuring out what is best for your situation.

To find an estate planning lawyer in your area, try searching Nolo’s Lawyer Directory.

Learn more about wills, trusts, avoiding probate and much more in the Estate Planning section of Nolo.com.

by: , Attorney

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