Trusts and Estates
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What Is a Spendthrift Trust?
A spendthrift trust is a specific type of irrevocable trust created for the benefit of a recipient, usually because he or she is unable to manage money and spending prudently. This trust type permits an independent trustee to have full authority to make all determinations as to how the trust’s funds will be expended for the benefit of the recipient or beneficiary. A huge advantage of the spendthrift trust is that creditors of the beneficiary of the trust usually cannot access nor attach the trust’s funds. This is because the funds in a spendthrift trust are not under the beneficiary’s control (they are under the control of the aforementioned independent trustee, instead). For this reason, spendthrift trusts are popular estate-planning tools, particularly for those aging parents who have worked hard to build their estates to a sizeable level and may find their children or heirs are unable to manage money prudently and responsibly.
What Are the Defining Features of a Spendthrift Trust?
The creator of a trust is referred to as the trustor, grantor, or settlor of the trust. This applies for spendthrift and other trust types. However, a spendthrift trust is not created unless the trust agreement contains express text that says the creator intended for the trust to be a spendthrift trust. In other words, there must be some enabling language or special legal text. This type of qualifying language is usually contained within a spendthrift clause or spendthrift provision.
What Are the Biggest Advantages of a Spendthrift Trust?
If an irrevocable trust contains a spendthrift provision, the trust will prevent creditors of the beneficiary from attaching the interest of the beneficiary in that spendthrift trust before the interest is distributed to the ultimate beneficiary. The creditors at issue are existing, as well as future creditors of the beneficiary. The trust interest is usually cash or some other form of property. Irrevocable trusts, if they are prepared well and contain the appropriate legal text, will contain spendthrift provisions even when the recipients or beneficiaries are not technically considered spendthrifts. The reason for this precautionary measure is because a spendthrift provision is able to protect both the trust and the trust’s beneficiary if the beneficiary is sued and a creditor tries to attach the beneficiary’s property interest in the trust.