When should you use a spendthrift trust?
A spendthrift trust can be useful if you have qualms that an heir will act irresponsibly with an inheritance or sell the right to payments if it is put into a trust fund. Individuals who suffer from drug or alcohol addiction may well be at risk for wasting an inheritance in order to support their habit. In such cases, a spendthrift trust would be suitable in providing economic support to an heir or in holding an inheritance.
The purpose of a spendthrift trust is to safeguard assets and the income generated by those assets from creditors’ claims. This type of trust offers some degree of fiscal protection for an heir who is prone to act imprudently with, or is incapable of handling, money. When drafting a spendthrift trust, you should use specific language that prevents trust property or funds from being transferred by the heir, and bars the heir’s creditors from reaching the assets.
You can assign a trustee to have the power to decide the frequency with which to distribute payments to the beneficiary, and the amount of each payment. There should also be an introductory provision in the spendthrift trust that stipulates the purpose of the trust, and includes the words, “spendthrift.” In addition, it is recommended that you have separate persons participating in the different roles of the trust. Thus, the person who creates the trust, or the settlor, should be different from the person administering the trust, or the trustee. And the recipient, or beneficiary, of the trust should not be involved in the creation or administration of the trust.
Another objective of a spendthrift trust is to prevent assets from being accessed in divorce cases. However, such assets can be reached in order to obtain child support and alimony.
Although the federal Bankruptcy Code provides that a spendthrift trust may be shielded from creditors’ claims, the bankruptcy trustee, and eventually creditors, may seize distributions of income made within 180 days following the date on which the debtor files for bankruptcy. If you are considering a spendthrift trust, you should consult an experienced estate planning attorney.