Assets in a Trust can be protected from creditors and from the beneficiary him or herself with the addition of a spendthrift provision. This simple tool can ensure that funds are protected and managed by a Trustee in the best interest of the beneficiary. When might you want to include such a provision in your Trust documents? We provide some examples here.
How Does a Spendthrift Trust Work?
Spendthrift provisions are well-established rules of law that date back to England in the 1200s when it was known as a Common Law Trust. A spendthrift is a person who spends money in an extravagant, irresponsible way, so it makes sense that a spendthrift provision protects funds from irresponsible use by the beneficiary. It does this by naming a Trustee to manage and disperse money to the beneficiary according to the wishes of the person who created the Trust, known as the Grantor. The Grantor might want the Trustee to simply make regular payments out of the Trust to the beneficiary once they reach a certain age, or the Grantor might also give the Trustee the power to stop payments altogether if the beneficiary falls into debt or begins making questionable decisions. The Trustee would be bound by fiduciary duties, of course, so presumably, this power would not be abused.
When Would You Want to Include a Spendthrift Provision in Your Trust?
There are several reasons you might want to include a spendthrift provision, and not all of them reflect mistrust in your beneficiaries. A big advantage of a spendthrift provision is that it protects the funds from lawsuits and creditors. So, for example, if the beneficiary causes a car accident and is sued for damages by the injured parties, the money in the Trust could not be accessed to pay them off. Likewise, if the beneficiary is forced into bankruptcy someday, the money in the Trust cannot be used to pay off debts. Other reasons for a spendthrift provision include:
- The beneficiary exhibits irresponsible behavior. If you know that one or more of your adult children is not good with money or is a gambler, alcoholic, convicted criminal, or drug addict, and you have significant assets to leave to them, a spendthrift provision is the ideal way to ensure that they have your support, but cannot squander the money recklessly.
- The beneficiary is particularly vulnerable. Your adult child might be responsible with money, but you might fear that they could be easily swindled or deceived by others out of their money. A spendthrift provision would make sure they can’t access too much of the money at one time, making them a less attractive target.
- You believe the beneficiary is in a bad marriage. Money in a spendthrift Trust will not be divided in a divorce. If you don’t trust your child’s spouse, this kind of Trust could be a smart move.
- The beneficiary is very young. If your children are young when you set up the Trust, you might want to include the spendthrift provision because you don’t know what kind of adult they will grow up to be. You can always change the terms of the Trust if you live a long life and your children prove to be responsible.
Although you might have a very good reason for wanting to protect Trust assets from a beneficiary, you don’t have to prove that the beneficiary is irresponsible or a financial risk. You can use a spendthrift provision in any way you choose. Laws that govern asset protection trusts vary from state to state, so you will want to work with an attorney to draft a Trust that meets your individual needs. In some cases, it might even make sense to establish a Trust in another state. A knowledgeable attorney will be able to help you with the entire process.
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If you are looking for Asset Protection advice for your farm or ranch, you need to speak with an experienced Asset Protection attorney as soon as possible. Contact us online or call our Texarkana office directly at 903.223.5653. We also have offices in Tyler, Paris, Longview as well as Magnolia, AR!