A Spendthrift Trust is a legal framework that protects the assets within a trust from a potentially irresponsible beneficiary who might harm the trust by overspending or squandering the assets. The spendthrift trust also protects the trust and its assets from creditors of the beneficiary. The creditors are not able to seize the assets of the trust instead of repayment for debt incurred by the beneficiary.
The Players in a Trust
A trust includes:
- The assets or trust principal – the property and assets of the trust but not the income that the trust earns.
- The Trustee – is the person who has the responsibility and control over the assets of the trust. Their role is outlined by the trust.
- The Beneficiary – The person who income or benefits from the trust.
- The Grantor – The person or people who set up the trust including the adding of assets, property, etc.
What You Need to Know About Spendthrift Trusts
- Decreased Access – A spendthrift trust limits the access that the beneficiary has to the trust assets. That includes using the trust’s property or assets as collateral.
- The Beneficiary does not own the assets of the trust. They belong to the trust and are controlled by the Trustee. The beneficiary cannot access, sell, or borrow against the assets of the trust. They have only access to the income generated by the trust as it is outlined by the trust.
- Payments to the Beneficiary are accessible by creditors of the beneficiary. Only the payment and not the assets of the trust.
- A Spendthrift Trust protects the assets of the trust from certain types of beneficiaries. Those include people who cannot make responsible decisions about money or who may be easily fooled into handing over the assets of the trust. It can also be a tool to protect the assets of the trust from people who do not handle money well, may have addiction problems, or may also be caught up in acts of gambling, etc.
- The terms of the trust spell out the power and role that the trustee has. By wording the trust in specific ways, the grantor writes the trust to behave in a certain way.
- The terms of the trust also spell out when and how payments are made and when times would indicate that payments cannot be made. This level of design takes the punitive action away from the trustee as certain rules are in place to dictate when a payment is made and when one is withheld. For example, if the income from the trust is not sufficient to cover the trust’s expenses, then payment to the beneficiary might be withheld to protect the trust.
Contact Charles D. Stark For More Information About Estate Planning
Trusts can be complex, but they are highly useful. Learn more about trusts and how to use them to protect assets while still providing a benefit to your beneficiaries. Charles D. Stark is an attorney and counselor at law who serves the greater Sonoma County population with estate, will, and trust planning and management.