How a spendthrift trust can protect prodigal loved ones

On Behalf of | Jun 15, 2016 | Trusts |

When a person makes the prudent decision to execute a comprehensive estate plan, they are not only helping ensure that their tax liability will be minimized and their hard-earned assets distributed according to their exact wishes, but also that their loved ones are provided for to a certain degree upon their passing.

However, what happens if the person sitting down to take this step has certain reservations about leaving anything of value to a particular loved one, meaning they’re afraid that they’ll somehow end up squandering the property or money left to them?

The fortunate news is that there is a viable estate planning mechanism through which a person can ensure that their prodigal loved one is provided for while at the same time protecting the property left to them: a spendthrift trust.

In general, a spendthrift trust is one in which the creator of the trust — otherwise known as the grantor — essentially limits the ability of a beneficiary to gain access to the trust principal, such that neither they nor their creditors can ever get to it. Similarly, it also prevents the beneficiary from promising the trust principal to another.

Indeed, a spendthrift trust is structured in such a way that the beneficiary receives a benefit — regular payments, good or services purchased using trust proceeds, etc. — via the named trustee. This ensures that only the benefit administered by the trustee, not the actual trust principal, could ever be compromised.

As for when a spendthrift trust might prove valuable, experts indicate that it should perhaps be considered in those scenarios where an intended beneficiary might have a history of poor financial decisions, incurring large debts, addictive tendencies (alcohol, drugs, gambling, etc.), or being swindled by unscrupulous parties.

We’ll continue this discussion in our next post, exploring the role played by the trustee in spendthrift trusts and some of the provisions that should typically be included when drafting these instruments.

If you have questions relating to the formation of a trust or any other estate planning issue, consider speaking with an experienced legal professional to learn more about your options.