When looking to leave behind assets to your loved ones whether that be real estate or another financial asset, establishing a trust is extremely useful. A trust allows your beneficiaries to avoid the costly and time-consuming probate process. Furthermore, by placing your property in a trust, you can benefit from substantial federal and state tax benefits.
While leaving assets behind for family and friends is extremely rewarding, this process can be frustrating and nerve-racking if one of the beneficiaries to your estate is not good with money, has an addiction that may cause them to squander the assets, may easily be deceived or experience fraud, or has substantial debts with creditors. If you are afraid of any of these situations occurring after a beneficiary receives their portion of your trust, you should consider creating a spendthrift trust.
What is a Spendthrift Trust
A spendthrift trust is a type of irrevocable trust in which the beneficiaries of the trust do not have direct access to the assets in the account. If a trust is irrevocable, it cannot be modified or revoked in any way after it is initially established. In a spendthrift trust, a trustee—a person which the principal of the trust assigns to oversee, manage, and distribute assets from the trust—provides beneficiaries with funds. The reason why this is important is that if assets are in a trust, they do not belong to the beneficiary and thus, beneficiaries and creditors have no claim on them.
Typically, the amount that the trustee will give a beneficiary is set at the time the spendthrift trust is established. Another way that the principal of the trust could set up the spendthrift trust is that the trustee will distribute assets as necessary for the beneficiary to keep up a certain lifestyle. Principals of a spendthrift trust commonly utilize these tactics. However, if instead of being irresponsible with money, a beneficiary has a lot of debt, the principal may make it so that the beneficiary can receive funds to make certain purchases.
A spendthrift trust is beneficial to protect your beneficiaries from unsustainable spending habits or current creditors. However, most states have laws against someone creating a spendthrift trust and naming themselves as one of the beneficiaries. Thus, you cannot use a spendthrift trust to avoid paying debts or other claims that people have against you.
Say you have a $2 million dollar estate that you plan on leaving to your only child. In the estate are many different types of assets. However, between a rental property and a collection of stocks, the estate generates $150,000 in yearly income. If you decide that your child poorly manages their own finances, you could place all of your assets into a spendthrift trust. This would make it so that your child can only receive the income from the trust. Furthermore, this disallows them from selling the assets within the trust. Thus, your child could still receive a substantial monthly income from your estate but cannot sell or pledge the assets within the trust in order to take on debt or make one large purchase.
How to Create a Spendthrift Trust
You create a spendthrift trust just as you would create any other type of trust. The grantor—principal of the trust—creates the trust by signing a legal document that designates the trustee and beneficiaries. Additionally, the initial trust documents state exactly how the trustee will manage and distribute the assets within a trust. The largest and most important part of this step is deciding exactly who will go in what positions. Additionally, the grantor must decide what assets you will include in the trust. To differentiate a spendthrift trust from a normal trust, you must include a spendthrift provision in the original trust documents.
This provision will detail exactly how the trustee will control and distribute the assets within the account. In many cases, a beneficiary will receive a certain amount of assets per month. The other option is that the trust limits the total amount of assets taken out of the trust every year.
Role of the Trustee
Choosing a good trustee is one of the most important parts to successfully creating a spendthrift trust. The trustee oversees, manages, and distributes assets within an account to the beneficiary. In most cases, a trustee will receive compensation for the work that they do for a trust. In a case where a trustee will be disbursing payments to a beneficiary over a number of years, it is extremely important that the grantor of the trust discusses the responsibilities and compensation of the trustee. If a grantor does not have this conversation with the trustee, the trustee may become unhappy with their responsibilities and leave their position.
If this occurs, the effectiveness of the spendthrift trust could completely deteriorate. Additionally, the grantor of the trust should name a secondary trustee. This protects the assets within the trust and the beneficiary in case the first trustee dies or leaves their position.
Trust and estate laws are complex. This is so no matter the type of trust you decide to establish. As such, it is extremely important to have legal representation that can help you correctly set up your trust. The Antonoplos & Associates trust and estate lawyers have over 20 years of experience helping clients in DC, Maryland, and Virginia set up spendthrift trusts. With this knowledge and experience, we can help with any legal issues that occur from setting up your trust.
Furthermore, Peter Antonoplos, founder and managing partner of Antonoplos & Associates has an LLM in Taxation from Georgetown University Law Center. With this knowledge, Peter can help you decide who to choose as the trustee for your spendthrift trust maximize the cost savings you receive from setting up a spendthrift trust in DC, Maryland, and Virginia.
Contact our DC Law Office for More Information
Finally, for more information regarding estate planning, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.