An important decision you must make when creating your estate plan is who’ll inherit your assets. While many of your beneficiaries are likely capable of managing an inheritance responsibly, others may be vulnerable to financial pressures, creditor claims, poor spending habits or other challenges that could erode the wealth you’ve worked hard to build.
One estate planning tool that can help safeguard an inheritance is a spendthrift trust. By placing assets in this type of trust, you can provide financial support for beneficiaries while adding a layer of asset protection.
You set the distribution parameters
A spendthrift trust prohibits a beneficiary from directly tapping its funds or transferring rights to someone else. The trust also generally can deny access to creditors or a beneficiary’s ex-spouse.
Under a spendthrift clause, the trust beneficiary relies on a trustee to provide payments based on the trust’s terms. These could be in the form of regular periodic payouts or on an “as needed” basis. The trust document spells out the nature and, if applicable, frequency of the payments.
One of the primary advantages of a spendthrift trust is creditor protection. If a beneficiary experiences financial difficulties, such as a lawsuit, bankruptcy or significant debt, creditors generally can’t force the trust to distribute assets to satisfy those obligations. Because the beneficiary doesn’t own the trust’s assets outright, those assets usually can remain protected until distributions are made.
Trustee acts as a gatekeeper
The role of the trustee is a critical one. Depending on the trust’s terms, he or she may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, how much and when. For instance, the trustee may be authorized to withhold payments upon the occurrence of specific events (such as if the beneficiary exceeding a debt threshold or declaring bankruptcy).
Designating the trustee is an important consideration, especially in situations where he or she will have broad control. A good choice can be an attorney, financial or investment advisor, or someone else with the requisite experience and financial acumen. You should also name a successor trustee in the event the designated trustee dies before the end of the term or otherwise becomes incapable of handling these duties.
Other considerations
Keep in mind that the protection offered by a spendthrift trust isn’t absolute. Depending on applicable law, government agencies may be able to access the trust’s assets — for example, to satisfy a tax obligation.
It’s also essential to establish how and when the trust should terminate. It could be set up for a term of years or for termination to occur upon a stated event, such as your child or grandchild reaching a certain age.
A valuable planning tool
A spendthrift trust isn’t necessary for every estate, but it can be an effective solution when protecting assets and preserving wealth are priorities. Whether you’re concerned about creditors, divorce or financial inexperience, or you simply want greater oversight of how an inheritance is used, a spendthrift trust may help strengthen your estate plan. Contact us with questions. We can help you determine if a spendthrift trust is right for your family’s circumstances.
Theus Law Offices specializes in a complete range of estate planning and elder law services, including wills, trusts, probate, successions, estate administration, and probate litigation. If you need a Louisiana wills and trusts lawyer or succession attorney in Alexandria, Lafayette, Lake Charles, Baton Rouge, New Orleans, Shreveport, Monroe, or elsewhere in Central Louisiana, let our certified estate planning specialist and probate lawyers help you.
