What is a "Spendthrift Trust"?

At their most basic level, Trusts are agreements based on the trust and confidence between the Trustee and the Trustor, who is the person making the Trust. The Trust Agreement authorizes the Trustee to administer the Trust assets and distribute them to the beneficiaries named in the Trust, according to the terms of the Trust document. A "Spendthrift Trust" is a specific type of Trust that you should consider including in your estate plan.

DEFINITION. A Spendthrift trust is the type of trust that provides property control by limiting the beneficiary’s access to the trust assets. Typical restrictions can protect Trust property from beneficiaries who could potentially squander that property, as well as protect the assets from the beneficiary’s creditors.

PURPOSE. Spendthrift Trusts are most often created by a Trustor who desires to leave property to a beneficiary whom the Trustor is concerned may not have the ability to use the property wisely, or could potentially have problems with creditors. A Spendthrift Trust can ensure that a portion of the Trust property can be made available to the beneficiary, while preventing the beneficiary from squandering it all at once.

INCLUDING THE APPROPRIATE TERMS FOR ASSET PROTECTION. There are certain terms that must be included in a Trust in order to ensure that it will properly protect the assets you place into the Trust. First, any interests you leave to your heirs must be either contingent on a future event or condition, or the interest must be subject to the Trustee’s complete discretion.

HOW IT WORKS. Spendthrift Trusts place restrictions on the access a beneficiary can have to the Trust principal. Primarily, the beneficiaries are not allowed access to the principal, nor can they promise the assets to anyone else. In other words, if a beneficiary cannot access the funds in the Trust, those funds would not be subject to their creditors either.

ACCESS IS ONLY AVAILABLE THROUGH THE TRUSTEE. Because the beneficiary of a Spendthrift Trust cannot have direct access to the Trust assets, their benefits can only be received through the named Trustee. This can be accomplished in the form of a regular payment from the Trust (like an annuity) or possibly goods or services bought for the beneficiary by the Trustee.

REASONS WHY MOST SPENDTHRIFT TRUSTS ARE PREFERRED. Spendthrift Trusts are generally most useful when the Trustor needs to leave property or cash for a beneficiary about whom they are concerned may not be the best at managing that property. Some reasons behind the need for more control might include that the beneficiary is not particularly good with money or is prone to getting in debt with numerous creditors. The beneficiary may also be an addict, which could lead them to squander the proceeds in order to feed that addiction. Beneficiaries who are easily deceived or defrauded may also be in need of protection from a spendthrift trust.

CONSIDERATIONS WHEN CREATING YOUR SPENDTHRIFT TRUST. The first thing to consider is the need to consult an estate planning attorney. Your lawyer can help you create your Trust by asking detailed questions about what you seek to accomplish. They can help you determine whether a Spendthrift Trust is actually right for you and your beneficiary.

You should also consider when and how do you want the Trust to be terminated and what should happen to the Trust principal if the beneficiary’s circumstances change. For instance, if the beneficiary dies or becomes better able to manage trust funds. Another consideration is whether you need to include provisions that allow for special payouts when the beneficiary incurs substantial expenses.

THE GENERAL BENEFITS OF A TRUST. Just like your Will, a Trust can provide a way for you to determine now how and when your property will be distributed upon your death. However, unlike a Will, a Trust can also give you a way to protect those assets in situations where a particular beneficiary may need special assistance in managing that property. Another advantage is that a Trust can help you avoid the time and expense of the probate process.

If you have questions about Trusts or other estate planning questions, give us a call at 253.858.5434 to set up an appointment today. We represent clients throughout Washington and Idaho and are available to meet in person, by phone, or via video conference.