What is a spendthrift trust?
UPDATED: December 16, 2019
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A spendthrift trust limits, by either amount or purpose, the way that your money will be given to your surviving offspring. By setting up a spendthrift trust, there will be more money to give for a longer period of time.
Advantages and Disadvantages of a Spendthrift Trust
Spendthrift trusts place the control of your money into the hands of a responsible trustee who determines, either through your specific instructions or through their own common sense, the appropriate reasons to release the trust funds. Spendthrift trusts are the most airtight form of trust and are meant for those children who spend money like water. Spendthrift trusts can even go so far as to prevent creditors and the courts from directly accessing the trust to pay the debts of your children. Finally, spendthrift trusts can prevent beneficiaries from signing away their payments in an attempt to gain a much smaller lump sum immediately.
While a spendthrift trust does allow the greatest control over your money upon your death, it may not win you brownie points with your children. In fact, it has been known to happen that a family becomes divided after spendthrift trusts are set up for certain children and traditional trusts for others. Additionally, a spendthrift trust cannot protect the money once it crosses your beneficiary’s hands. In fact, modern courts consistently garnish trust payments for everything from child support and alimony to payment of tax and personal debt.
Drafting a Spendthrift Trust
When it comes to a spendthrift trust, the phrasing is everything. You must have specific language in the trust documents in order for it to be considered a spendthrift trust. If not, it will be considered an ordinary trust and the protections you are seeking to implement will not go into effect.
Foremost, it's the goal to prevent your child, or children, from signing away their money or from creditors accessing it. For this protection, use phrasing such as, “No interest in the principal or income of this trust shall be anticipated, assigned, encumbered, or subjected to any creditor’s claim or to legal process before its actual receipt by the beneficiary.”
Next, you’ll want to specify when money can be released. Typically, a monthly or annual sum is given to the beneficiary. If this seems too generous, you could place specific limitations on releases, such as a lump sum to be given as a wedding present or for obtaining a reputable career. Otherwise, you can place a provision stating that the money is only to be used for the care, welfare, and education of the individual.
Getting Legal Help
If a spendthrift trust sounds like a necessary estate planning measure for you, contact an estate planning attorney for a consultation. Remember that drafting spendthrift trust documents is important, and an estate planning attorney will know the legal language for your particular state.