A spendthrift trust is a great tool to protect, preserve, and pass on wealth to beneficiaries. Read on to find out the benefits of a spendthrift trust and what makes a spendthrift trust so special.

What is a Spendthrift Trust?

A spendthrift trust is a property control trust that limits the beneficiary’s access to the trust funds. Spendthrift trusts are usually set up by a someone who wants to leave property to a beneficiary but they are worried that the beneficiary will spend the money all at once, squander the assets, or simply not use the monies or property in a wise manner. A spendthrift trust makes sure that some trust property can be made available to the beneficiary, without the possibility that the beneficiary could squander it all at once. This type of trust is perfect because it restricts the beneficiary from squandering trust property. A spendthrift trust also limits the types of claims creditors can file to access or levy against trust funds. If you are worried your loved one won’t use the trust property wisely, create a spendthrift trust. The spendthrift trust will allow some trust property to be made available to the beneficiary and limit him/her from excess spending.

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What is a Spendthrift?

A “spendthrift” is a person who extravagantly or wastefully spends (pays out, disburses, expends or dispose) possessions, money, wealth, or other resources.

Terminology in a Spendthrift Trust

Unfamiliar words are often found in legal documents. Here are some words you will come across when reading this article about the benefits of a spendthrift trust.

Settlor – The trust settlor is the person who creates that trust.
Beneficiary – The trust beneficiary is a person or business that receives a benefit from the trust.
Trustee – The trustee is the person or business who controls the trust. The trust is controlled in accordance with trust property.
Trust property – The trust must be funded with property to be valid. This may include personal property.

In a spendthrift trust, the trustee is in control of the trust property, therefore choose your Trustee wisely! The trustee must administer the property in accordance with the trust terms and conditions. The trustee may be required to make payments to the beneficiary each month or decide how much money the beneficiary needs each month. Trust settlors can choose themselves as the trustee. The trust settlor should name a successor trustee as a back-up plan.

Benefits of a Spendthrift Trust

There are many benefits of a spendthrift trust. First, a spendthrift trust helps guard wealth. It limits and restricts the beneficiary’s ability to assign or transfer his/her interest in the trust. It also restricts the rights of creditors to reach trust assets.

Consider creating a spendthrift trust if you will be leaving money to a minor. How many times have you heard a story about young adult children depleting their entire inheritance in a very short time? One of the benefits of a spendthrift trust is allowing you, the trust creator, to specify when the minor or young adult receives the money and how much. You can also place specific conditions on the beneficiary to fulfill for them to receive a benefit (ex – reach a certain age, complete college, or stay drug free). One of the best benefits of a spendthrift trust is that you have complete control over what happens to your assets after you die. On the other hand, if you fail to create a trust, your assets will go through the probate process. Upon the estate completing probate, your beneficiaries will be able to do as they please with their inheritance.

Provisions of a Spendthrift Trust

First and foremost, a spendthrift trust is irrevocable. Being irrevocable, it prevents creditors from attaching a beneficiary’s interest in the trust before the asset or property is actually distributed to him or her. Most  irrevocable trusts will have spendthrift language in them even though the beneficiary who is to receive the property may not be a “spendthrift”.

A spendthrift provision prohibits the beneficiary from spending the money before they actually receive the distributions. Furthermore, the trustee has the final authority to determine what payments are necessary and should be paid out to the beneficiary based on the provisions in the trust agreement. In other words, a spendthrift trust provision protects both the trust and the beneficiary, particularly if the beneficiary is sued and a creditor attempts to collect against the beneficiary’s interest in the trust.

It is important to understand that a spendthrift trust can only protect property that is in the trust. With a few exceptions, a creditor can reach any property once it has been distributed to beneficiary (the person entitled to receive the property). Furthermore, the spendthrift protection of the trust stops if a beneficiary refuses a distribution that is allocated in a trust. For example, if a beneficiary declines a distribution and chooses to have the property to remain in the trust. the creditors of that beneficiary would be able to collect on those allocated trust assets, even though the beneficiary had not received them.

Contact A People’s Choice for more information about the benefits of a spendthrift trust in California and how we can help you set up a spendthrift trust as part of your estate plan. Call us at 800-747-2780 or simply complete the contact form found in this article.

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