What Is a Spendthrift Trust and How Does It Work?
A spendthrift trust ensures that your beneficiaries receive income from the trust, but can’t withdraw principal. This preserves assets for future generations and protects the assets from irresponsible or unwise spending decisions. The creation of a spendthrift trust allows you to appoint a trustee who manages your beneficiary’s access to funds. You can either limit access completely or allow your beneficiaries to draw a limited amount of money each month. If you anticipate that your beneficiary will need more than the monthly allowance, then you can always make an exception. Some spendthrift trusts also protect the principal from creditors and lawsuits. This is particularly important in cases where you want to specifically protect certain assets for your heirs, such as a family home.
Who Should Consider a Spendthrift Trust?
There are a few reasons why you might want to consider setting up a spendthrift trust. For one, it can be an effective way to protect your beneficiaries’ assets from irresponsible spending or creditor claims. Secondly, it can help ensure that your beneficiaries have a stable income from the trust. For example, a spendthrift trust is a good option for parents who want to ensure that their college age children have the funds they need to attend school and live off campus, but don’t want to give them full access to trust principal.
Making Your Trust Spendthrift
There are two ways you can make your trust spendthrift: you can include a spendthrift provision in the trust document, or you can use an irrevocable trust.
Including a spendthrift provision in your trust document is the simplest way to make your trust spendthrift. This clause prohibits your beneficiaries from selling or transferring their interest in the trust, and prohibits anyone who receives a distribution from the trustee from assigning or pledging it as collateral.
Using an irrevocable trust, on the other hand, may be preferable if you want to give your beneficiaries access to their funds and still protect them from creditors and lawsuits. If you use this approach, you should include language in the trust that says the trust will remain spendthrift even if you or your beneficiaries change their mind.
Pros and Cons of a Spendthrift Trust
There are a few pros and cons to consider when deciding if a spendthrift trust is right for you. On the plus side, a spendthrift trust can help protect your beneficiaries’ assets from creditors and lawsuits. It can also provide them with a steady income stream. On the downside, a spendthrift trust can be expensive to set up and maintain. In some cases, your beneficiaries may also be able to challenge the trust’s spendthrift provisions in court. If you’re thinking about setting up a spendthrift trust, it’s important to consult with an experienced estate planning attorney to discuss your specific needs and goals .
The Bottom Line
If you are considering setting up a spendthrift trust, it is important to speak with an estate planning attorney to discuss your specific needs and goals. This type of trust can be expensive to set up and maintain, but it can provide valuable protection for your beneficiaries’ assets.
Spendthrift Trust FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.