A spendthrift trust is a type of property control trust that limits the beneficiary's access to the trust principal. This restriction protects trust property from:
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 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:
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A spendthrift trust puts restrictions on the beneficiary's access to trust principal. Essentially, the beneficiary can't access the trust principal, or promise it to anyone else. Because the beneficiary can't access trust funds, neither can the beneficiary's creditors.
Instead of having direct access to trust property, the beneficiary receives benefits 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. |
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 the beneficiary has control of it. There are a variety of reasons why a grantor might not trust a beneficiary with the responsibility of controlling the trust's funds. For example, the beneficiary might be (or the grantor might believe that the beneficiary is):
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.
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 might be required to make set payments to the beneficiary every month, or the trustee might 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.
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 on 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 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 can't be a trustee.
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 might also need to consider:
If all of this sounds complicated, it can be. Ask your lawyer for help figuring out what is best for your situation.
Learn more about wills, trusts, avoiding probate, and much more in the Estate Planning section of Nolo.com.
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