Spendthrift Trust: How does it work?

A spendthrift is a type of trust which limits the beneficiary’s access to trust assets according to certain conditions set by the grantor. Spendthrift Trusts protect assets and ensure beneficiaries don’t waste their inheritance.

Instead of releasing the money in a lump-sum, the trustee releases it incrementally.


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. A spendthrift trust is especially helpful if you have a beneficiary who:

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  Unable to make mature spending decisions.
  

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  Irrational with money.
  

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  You are in heavy debt or you’re at risk of becoming heavily indebted.
  

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  Easy to fool or defraud.
  

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  Addiction that could lead to excessive spending.
  

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  Children with functional needs are eligible for SSI and Medicaid
  
  
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  If you are involved in a divorce or risk getting one (courts can’t consider trust assets marital assets when dividing assets).
  
  
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  Working in an industry with frequent lawsuits (creditors can’t typically seize trust assets for settlements).
  

What is a Spendthrift Trust?

The spendthrift trust has three main elements:

• A Grantor: The grantor, also known as the “settlor,” is the person that creates the trust by transferring their assets to it.

• A Beneficiary: The beneficiary is the person who benefits from the trust.

• A trustee is a person who manages trust assets according to the terms of the agreement. If you choose to be the trustee, you will need to name a successor trustee to take over in case you pass away or become incapacitated.

A spendthrift trust differs from other trust types in that it has a clause on spending (also called a provision for spending). The spendthrift provision designates that the trust is the sole owner of the trust assets and does not automatically transfer ownership to the beneficiary upon your death. The trust terms will explain how and when your trustee will release funds to you beneficiary according to the schedule that you set.

You can restrict the beneficiary’s ability to access funds. You can limit the beneficiary’s access to funds by limiting the trustee to transfer certain amounts at fixed dates. You can designate exceptions to cover emergencies.

While assets in a trust for the spendthrift are usually safe from creditors, you should be aware that there are some exceptions. You should also check with your state before proceeding.

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  Child Support Obligations
  

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  Creditors who have a court judgment that is enforceable against the beneficiary.
  

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  Trust income is higher than beneficiary’s needs for support.
  

A spendthrift living (inter vivos) trust can be used as an alternative to the spendthrift trust. It disburses money in small increments, while you are still alive. You can be the trustee and schedule your own disbursements. You must, however, name a successor to take over this responsibility in the event of your death.

Below are some examples of a trust that is prone to spending.

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  Miriam, 95, wants to leave all of her estate, valued at $450,000, to Kyle, her great-nephew. Miriam does not want to give Kyle his inheritance at once, even though Kyle is responsible and mature. Kyle has a massive medical bill from an emergency surgery. He’s fighting his insurance company for coverage. Miriam, who knows that her insurance company is unlikely to pay and that creditors are constantly harassing Kyle, decides that a trust for spendthrifts will give Kyle a $3000 monthly allowance. Kyle will be able to live comfortably while he recovers, and creditors will not be able to take the majority of his estate, as the remaining trust assets are considered trust assets, rather than Kyle’s personal property.
  

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  Edward would like to leave $50,000 to his granddaughter Amanda when he passes away. Amanda, a loving and sweet granddaughter, is only in her 20s and has a history of reckless expenditure. Edward creates a trust to prevent Amanda from spending her inheritance. The trust allows Amanda to withdraw up to $1,000 per month from the account. She can now treat herself to some luxury items without having to spend her entire inheritance.
  

Is it possible to revoke or irrevocably a spendthrift trust?

Spendthrift trusts are either irrevocable or revocable.

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  Spendthrift revocable trusts offer flexibility. You can change the terms of the trust if the beneficiary changes or matures.
  

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  Spendthrift irrevocable trusts can reduce estate taxes.
  

Pros of spending-thrift trust

Trusts for spendthrifts have a number advantages:

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  Can protect beneficiary’s assets from creditors and lawsuits.
  

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  Provides a steady stream of income to the beneficiary while preventing irresponsible expenditure of assets.
  

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  The grantor may retain control of the assets.
  

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  Assets of a spendthrift trust are often excluded when calculating estate taxes.
  

• You are not subject to Probate , if you establish it while alive.

Spendthrift trust scams

Spendthrift trusts have a few drawbacks:

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  These devices can be expensive to install and maintain.
  

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  You won’t be allowed to change your trust if the circumstances change.
  

How do you set up a trust for the spendthrift

You can create a trust for the spendthrift yourself using an online estate-planning platform. It will guide you through each step. You may want to work directly with an attorney for estate planning because minor mistakes could invalidate or compromise your trust. State laws vary on when and how spendthrifts trusts can be used, who can take assets from them, and what happens to disbursements.

Ask yourself a few questions to ensure that your trust operates according to your wishes and needs: