A spendthrift trust is typically used to prevent a beneficiary from receiving his or her inheritance all at once. There are several reasons why a grantor (the person who creates the trust) might want to consider such an approach. The most obvious reason is that the grantor believes the beneficiary will quickly squander the inheritance. That is, the beneficiary is a spendthrift.
Other reasons to consider a spendthrift trust include:
- The beneficiary (or the beneficiary’s spouse) has many debts and, consequently, the inheritance could be lost to creditors
- The beneficiary’s marriage is troubled and seems likely to end in divorce
- The beneficiary’s friends are spendthrifts (or worse) and have undue influence over the beneficiary’s behavior
- The beneficiary is simply “not good with money”
- The beneficiary suffers from alcohol or drug addiction
How does a spendthrift trust protect the beneficiary’s inheritance in situations like these? First, the beneficiary cannot access the assets in the trust, or promise them to someone else. Thus, creditors and other threats cannot reach the trust’s assets either. In addition, since the beneficiary’s inheritance can be distributed in specified amounts over time, the entire inheritance cannot be lost all at once. Of course, the portion that is distributed would be vulnerable unless other protective measures are taken.
The Role of the Trustee
It is crucial to choose one’s trustee carefully because the terms of the trust give the trustee control over trust assets and their distribution to the beneficiary. Similarly, it is extremely important to outline the trustee’s authority in detail. Here are some examples of factors to consider when setting the terms of the spendthrift trust:
- Should the trustee be instructed to make fixed payments according to a specified schedule, or does the trustee have some discretion to choose the amount and timing of distributions?
- Should the trustee make distributions in cash or provide the beneficiary with goods and services instead?
- Can the trustee withhold distributions if the beneficiary behaves inappropriately? If so, what types of behavior would trigger the withholding of assets?
Given the importance of the trustee’s role in administering the trust and managing the beneficiary’s inheritance, the choice of trustee should not be taken lightly. The decision to serve as trustee should not be taken lightly either. In certain situations, the trustee could very well be performing the role of mentor, or disciplinarian, or even parent. In addition, the trustee can be held legally and financially responsible for failing to follow the mandates of the trust.
Other factors to consider when creating a spendthrift trust include how and when the trust will end, what will happen if the beneficiary “grows up” and develops the maturity to manage the inheritance, and what should be done with trust assets if the beneficiary passes away.
If you want to leave a loved one an inheritance but are concerned about his or her ability to manage it, we can help you determine whether a spendthrift trust is a good solution.