In creating your estate plan, you might wish to provide for the personal and living expenses of certain beneficiaries by means of a trust. However, you may have concerns that one of those beneficiaries could end up abusing or misusing the assets that you leave to them. Fortunately, there is a way that you can take care of your loved one while also taking steps to prevent that person from wasting his or her inheritance. This is where a spendthrift trust may be desirable.
In addition to reaping tax and other benefits that come with trusts, you can rest assured that your beneficiary will be taken care of with the estate you leave behind. However, creating one of these instruments is not something that you should do without legal counsel. You can depend on the experienced Estates & Trusts team of SederLaw to assist you.
What is a Spendthrift Trust?
Before discussing the nature of a spendthrift trust, it’s important to understand a few basic terms:
- Grantor: also known as the trustor, this is the individual who creates the trust and funds it with assets
- Trustee: the trustee is the individual selected by the trustor to administer the trust and carry out its terms. A trustor may name him- or herself as trustee, and upon death, another person will take over as trustee.
- Beneficiary: this is the person who receives assets as they are distributed through the spendthrift trust
A spendthrift trust is a type of trust that restricts the beneficiary’s ability to access funds, according to the terms and conditions that are set forth by the grantor. The purpose is to protect a beneficiary with reckless or irresponsible spending habits from squandering his or her entire inheritance. Rather than allow the beneficiary to inherit all the money at once, and potentially waste it, the spendthrift trust distributes money to that person incrementally.
If your beneficiary meets any of the following criteria, it may be a good idea to create a spendthrift trust rather than distribute assets outright to that person:
- Too immature to make smart spending decisions
- Impulsive or irresponsible with money
- Consistently lives above his or her means
- Has heavy debt or shows signs of going into heavy debt
- Is easily defrauded, tricked, or manipulated by others
- Has an addiction that could result in excessive spending
- Has a psychiatric or mental disorder
The role of the trustee is to make decisions on how and when to distribute trust assets to the beneficiary, provided those decisions are consistent with the trust’s terms. Creditors are not able to access trust funds which means that those assets will be protected for your beneficiary’s use. However, there are certain debts that the trust will be required to pay, such as child support, spousal support, tax liens, and debts for food and shelter.
Creating the Spendthrift Trust
One of the first tasks you’ll need to take care of is to determine who will serve as a trustee. This should be a diligent individual who will follow the instructions in your trust and who understands how to make responsible disbursements to take care of the beneficiary’s reasonable expenses. The amount of discretion the trustee will be able to exercise will depend on the trust’s terms as well as your level of comfort with that person.
As an example, the trustee may be responsible for making scheduled payments of a certain amount to the beneficiary. On the other hand, the trustee could be given wide latitude to disperse trust assets, as he or she sees fit, to cover the beneficiary’s needs and expenses. The trustee can even be empowered to withhold payments if certain events occur, like the beneficiary exceeding a certain debt threshold. Regardless, the trustee’s duties will ultimately be defined by the terms of the spendthrift trust, and the trustee must follow those terms even if he or she does not agree with them. So it is important that you work closely with your attorney in drafting the provisions of the trust.
There are various ways to arrange how and to whom beneficiary payments will be made. Here are some examples:
- Fixed expenses like rent, educational tuition, and utility bills can be paid directly to the third parties responsible for those costs (e.g. the beneficiary’s landlord). This avoids the problem of having the beneficiary access the money and spend it on non-essential items.
- A small weekly or monthly stipend could be paid to the beneficiary to cover smaller expenses where wastefulness is less of a concern. Of course, this will still depend on how responsible the beneficiary is and the risk that this money could be misused (such as to feed an addiction).
- Larger sums of money could be released to the beneficiary upon reaching certain life milestones, such as graduating college. Grantors often include these milestones in the trust terms because they demonstrate maturity on the beneficiary’s part and suggest that the person is capable of being responsible with the money.
One of the last things you’ll need to discuss with your attorney is how and on what conditions the spendthrift trust will terminate. Some trusts end after a set number of years while others exist until a major life event occurs, like the beneficiary reaching a certain age.
Contact Our Worcester Spendthrift Trust Attorney
Every grantor who creates a spendthrift trust does so for different reasons and has different concerns about the needs, well-being, and financial capabilities of the beneficiary. Our firm will take the time to understand your objectives and then get to work designing a unique trust that will carry them out. To get started with your spendthrift trust, or to learn more about these important legal instruments, connect with SederLaw’s Estates & Trusts team today.
