Spendthrift Trusts: Sometimes it’s What You Don’t Give That Matters Most

/ June 5, 2013

TrustNowhere are you more generous than with your family.  Whether you are saving for your children’s education, helping with the purchase of a first car, or helping to plan a wedding, your family is first in your mind and in your heart.  This generosity often plays out in perhaps the most tangible way when planning for loved ones at your passing.

For many people, the largest financial gifts they will ever make will be to their spouse and children at the end of their lives.  But what happens when they have a family member who is not able to financially care for him- or herself—who has a pattern of mismanaging money, making poor decisions, or who has had problems with substance abuse or gambling?  What kind of gift would they be giving this loved one if they gave them an outright windfall of cash?  Fortunately, this gift can still be made with the assurance that the money will be managed responsibly by using a spendthrift trust.

A spendthrift trust is an irrevocable trust created for a beneficiary which gives a trustee the authority to make decisions on how the funds are spent for that beneficiary. Because the beneficiary never actually owns or controls the trust property, the beneficiary’s creditors are unable to reach the trust assets.  The grantor of the trust will have peace of mind knowing that there will be some level of care available to the beneficiary, regardless of what the future holds.  In short, spendthrift trusts protect beneficiaries from themselves.

Most trusts drafted today contain a spendthrift provision because it protects the trust property and a trust’s beneficiary from judgments and attachments from creditors.  Note, though, that once a trustee releases funds to a beneficiary (in the form of a stipend, or via the purchase of some piece of property, such as a car), that property is no longer under the protection of the trust and can be attached or otherwise taken by creditors.  Trustees can sometimes purchase a residence and hold it in the trust to prevent a beneficiary from mortgaging or selling the real estate, and can perform annual inspections to ensure that the trust property is kept in good condition.

Spendthrift trusts are particularly useful when a beneficiary is a vulnerable person who cannot manage his or her finances; the trustee serves as go-between, shielding the beneficiary from making any rash or irresponsible decisions that might put the trust assets at risk.  The trustee also ensures that no third parties can take advantage of the beneficiary in hopes of profiting from fraud or other theft of the trust property.

An inheritance or a lifetime gift can change the life of a family member for the better.  But if the beneficiary is not capable of managing his or her finances, a windfall of cash can cause tremendous problems.  Sometimes it is the gifts we don’t give that can make a difference—putting a gift in trust instead of giving it to a family member outright can serve to protect the family member while still providing a comfortable standard of living, with fewer risks of the funds being lost to poor judgment, mismanagement, or the influences of third parties.

 

 

This article has been prepared for educational purposes only. The information in this article is not, nor is it intended to be, legal, financial or tax advice. Legal, financial and tax advice is dependent upon the specific facts and circumstances of each unique situation. The information contained in this article should not replace the advice of competent legal counsel licensed in your state, a qualified financial planner or a tax practitioner licensed in your state.

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