What is a Spendthrift Trust ?
When it comes to estate planning, there are many factors to consider, not the least of which how to provide for loved ones. Although we like to believe that our heirs are deserving and capable of managing an inheritance, some beneficiaries may not be responsible or lack an understanding of financial matters. Fortunately, it is possible to leave assets to a troubled heir by creating a spendthrift trust.
This estate planning tool limits a beneficiary’s access to trust property in order to protect it from him or herself as well as creditors. Rather than providing assets or funds directly to the beneficiary, the trust maker (or grantor), designates a trustee to manage the trust property and provide regular payments to, or purchase goods and services for, the beneficiary.
Spendthrift trusts are typically created when an heir does not know how to manage money or is frequently delinquent with debt. In addition, a spendthrift trust can protect those who have drug, alcohol or gambling problems or who are at risk of being manipulated.
The role of the trustee
The trustee is responsible not only for managing the trust, but also protecting the assets from being squandered by the beneficiary. This requires the trustee to manage the trust in a manner that preserves the value of the assets while providing for the beneficiary.
In order to do so, the trustee should have the power to make set payments to the beneficiary on a regular basis. Similarly, the trustee must also be able to withhold payments under certain conditions, particularly if the beneficiary gambles or gets into debt. However, this would also require the trustee to monitor the beneficiary’s behavior, which could be problematic.
Finally, the grantor could also specify conditions under which payments should be released to the beneficiary. For example, the grantor could instruct payments be made directly to a landlord or a creditor rather than the beneficiary. In some cases, the beneficiary could also be required to undergo drug or alcohol testing before receiving a payment from the trustee.
In sum, a well designed spendthrift trust must consider the unique relationship of all the parties. It is crucial for the grantor to name a trustee who is honest and capable, and who will fulfill his or her obligation to preserve the trust assets and provide for the beneficiary.