To establish a trust, a trustor, or settlor, transfers ownership of certain funds and assets to a trust. The funds held in trust, the trust principle, are then managed for the benefit of the trust beneficiaries. This is a trust in its most basic sense. There are, however, a variety of different trust types that are defined by things such as the type of beneficiary, the terms of the trust, the direction for trust distributions, and the ability of a beneficiary to access assets held in the trust. Because of the structure and variety of different trust types, trusts can be useful in an estate plan for a number of reasons. The reasons will, of course, depend on the type of trust as well as your goals for the trust. Here, we will discuss three reasons to consider establishing a spendthrift trust.
Three Reasons to Consider a Spendthrift Trust
A spendthrift trust is one that is usually established because of the financial difficulties or money management issues or poor spending habits of a beneficiary. This is how the trust earned the name “spendthrift.” Three reasons why you may want to consider establishing a spendthrift trust as part of your estate plan include:
- Protecting an inheritance from the poor spending habits of a beneficiary. Should you want to leave an inheritance to a loved one, but worry that they will quickly blow through a lump sum amount left to him or her, a spendthrift trust can help prevent this from happening. Instead of a lump sum inheritance, you can provide for the inheritance to be distributed through the spendthrift trust in increments spaced out over time.
- Protecting an inheritance from creditors of a beneficiary. If you want to leave an inheritance to a loved one who struggles with outstanding debt, creditor issues, or you believe may be doing either of these things in the near or not so distant future, you can rest easy knowing that a spendthrift trust will shield trust assets from creditors of the trust beneficiary. This is because the assets are, essentially, owned by the trust, and beneficiaries of a spendthrift trust are not able to access trust assets. Instead, they only receive distributions the trustee is authorized to distribute according to the terms of the trust.
- You set the conditions on trust distributions. Are you worried that a loved one will forego college? Do you have concerns that a loved one struggling with an addiction will never seek treatment? You can help encourage them down these paths through conditioning trust distributions. A spendthrift trust can be established so that the terms of the trust condition distributions on certain things. For instance, trust distributions could be conditioned on a beneficiary enrolling in college or another institute of higher education.
Estate Planning Attorney
Are you interested more in learning about spendthrift trust and other valuable estate planning tools? Talk to the knowledgeable team at Verras Law. Contact Verras Law today.