Are you worried that your heirs will foolishly spend their inheritance or lose it to creditors? You may want to consider establishing a “spendthrift” trust.
A spendthrift trust is a type of trust designed to protect the assets from being misused by the beneficiary or from creditors. This trust allows the trustee to control the distribution of the trust’s assets to the beneficiary in a way that ensures the beneficiary does not squander the funds due to poor financial decisions or external pressures.
What is a Trust?
A trust is a legal arrangement in which one party, known as the settlor or grantor, transfers assets to a trustee to be managed for the benefit of another party, known as the beneficiary. The settlor creates the trust and sets the terms, specifying how and when the assets should be distributed. The trustee, who can be an individual or an institution, has the fiduciary responsibility to manage the trust assets according to the settlor’s instructions and in the best interest of the beneficiary. Beneficiaries are the individuals or entities entitled to receive benefits from the trust, which can include income, principal, or other distributions as defined by the trust agreement.
Key Features of a Spendthrift Trust
Trustee Control: The trustee has the discretion to determine how and when the assets are distributed to the beneficiary. This helps prevent the beneficiary from spending the assets imprudently.
Protection from Creditors: Since the beneficiary does not have direct control over the trust assets, creditors cannot claim the assets to satisfy the beneficiary’s debts.
Spendthrift Clause: This clause explicitly states that the beneficiary cannot sell or pledge their interest in the trust as collateral for a loan, further protecting the trust assets.
Beneficiary Protection: It is particularly useful for beneficiaries who have a history of poor financial management.
Setting Up a Spendthrift Trust
- Choose a Trustee: Select a trustworthy and capable individual or institution to manage the trust. This could be a family member, friend, or a professional fiduciary such as a trust company.
- Draft the Trust Document: Work with an estate planning attorney to draft the trust document, including the spendthrift clause and specific instructions on how the assets should be managed and distributed.
- Fund the Trust: Transfer the desired assets into the trust. This can include any asset including investment accounts that can be managed alongside your other investments at Foster & Associates. The underlying portfolio can be structured to yield the level of distributions your beneficiary requires.
- Administer the Trust: The trustee will manage the trust according to the terms set out in the trust document making distributions as specified, in coordination with you Foster & Associates advisor.
Considerations
The success of a spendthrift trust heavily depends on the trustee’s judgment and integrity. It is crucial to select someone who will act in the best interest of the beneficiary. In addition, establishing a spendthrift trust can have legal and tax implications. Consulting with an estate planning attorney and a tax advisor is essential to understanding these aspects fully.
If you would like to learn more about spendthrift trusts speak to your Foster & Associates financial advisor.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
