Trustees often worry that beneficiaries might squander their inheritances or simply aren’t equipped to handle the financial responsibilities that come with large sums of money. If this is a concern, you don’t have to hold on to your assets until the day you die with the hope that your heirs will change their ways by that time. It might be in your best interest to consider using a spendthrift trust that can provide protection, regardless of how long you live.
As with other trusts, a spendthrift trust may incorporate various tax benefits. However, that’s not its primary focus. This trust type can help you provide for an heir while protecting assets from their potentially careless actions.
Spendthrift Trust In Action
Generally, a spendthrift trust’s assets will consist of securities such as stocks, bonds, and mutual funds, and possibly real estate and cash. The appointed trustee manages the assets.
The terms of the trust restrict the beneficiary’s ability to access funds in the account. Therefore, the beneficiary can’t invade the trust to indulge in a wild spending spree or sink money into a risky business venture. Similarly, the trust assets can’t be reached by any of the beneficiary’s creditors.
Instead of having direct access to funds, the beneficiary usually receives payments from the trust on a regular basis or ‘as needed’ based on the determination of the trustee. The trustee is guided by the terms of the trust and must adhere to fiduciary standards.
Be aware that the protection isn’t absolute. Once the beneficiary receives a cash payment, they have full control over that amount. The money can be spent without restriction.
Role Of The Trustee
Depending on the trust terms, the trustee may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, along with how much and when. Designating the trustee is an important consideration, especially in situations where he or she will have broad control.
Although it’s not illegal to name yourself as trustee, this is generally not recommended. Usually, the trustee will be an attorney, financial planner, investment advisor, or someone else with the requisite experience and financial acumen. You also should name a successor trustee in the event the designated trustee dies before the end of the term or otherwise becomes incapable of handling the duties.
Other Key Considerations
There are several other critical aspects relating to crafting a spendthrift trust. For example, will the trustee be compensated and if so, how much? You also must establish how and when the trust should terminate. The trust could be set up for a term of years or termination may occur upon a specific event (such as a child reaching the age of majority).
Finally, try to anticipate other possibilities, such as enactment of tax law changes, that could affect a spendthrift trust. A word to the wise: This isn’t a do-it-yourself proposition. We’d be pleased to help with any questions regarding a spendthrift trust.