A spendthrift trust is a type of trust used in estate planning and asset protection because it provides certain protections from the trust beneficiary’s creditors and can prevent the beneficiary from accessing the trust principal. A spendthrift trust does not allow the beneficiary to transfer, assign, sell or pledge his interest in the trust to his creditors or others. Another type of trust sometimes used by parents concerned about the ability of their children to handle a large inheritance is a silent trust.
A spendthrift trust is often used by a grantor or settlor whom believes the intended beneficiary of a gift or inheritance is not good at handling money and would squander the trust assets if the beneficiary received them in one lump sum. See gifts and gifting. Spendthrift trusts may be used to protect the inheritance of an heir if such heir is subject to liability through his or her profession or could lose inherited property due to divorce or creditor claims. Self-settled spendthrift trusts are also used in some states by individuals that want to protect their own assets by placing them in trust.
How Does a Spendthrift Trust Work?
In a spendthrift trust, the person making the trust, called the grantor or settlor, places property in trust for the benefit of another person, called the beneficiary. The grantor or settlor names one or more trustees to manage the trust property and make disbursements to the beneficiary as outlined in the trust. If you need someone to manage the trust, review our article about trust companies. One disadvantage of spendthrift trusts is the expense involved in paying a trustee for services in administering the trust.The trust document can be drafted to provide income or principal or both to the beneficiary in a variety of ways. The spendthrift trust may provide that the beneficiary shall receive all the income from the trust property at regularly scheduled intervals for the life of the beneficiary. The trust document may provide that the beneficiary shall receive the principal of the trust upon reaching a certain age or it may provide that the trust property shall pass to the children or heirs of the beneficiary upon his or her death.A spendthrift trust may limit the amount the beneficiary can receive to the income earned from the trust property or the trust may be drafted to give the trustee discretion to invade the trust principal for extraordinary needs of the beneficiary, such as medical costs or educational expenses. Instead of paying income to the trust beneficiary, some spendthrift trusts require the trustee to pay certain expenses directly for the beneficiary. See Living Trust for Child with Drug Problem. For example, if the beneficiary owes a lot of debts, the trust document may contain language giving the trustee discretion to pay the beneficiary's expenses instead of making an outright distribution to the beneficiary.
What are Self Settled Spendthrift Trusts?
The majority of U.S. states do not allow a settlor or grantor to place his own property in trust and name himself as beneficiary to protect his assets from creditors. However, several states have enacted legislation which enables individuals to place their own assets in a self settled spendthrift trust and receive protection from creditors, provided the settlors or grantors meet certain requirements and have not engaged in a fraudulent transfer. As states try to encourage more investment within their jurisdiction, more states may enact these types of asset protection laws in the future.
To find the laws governing trusts in a particular state, go to our page on Trust Law.If you are interested in making a trust for asset protection purposes, consult an attorney for information about the asset protection strategies available under the laws of your state. To learn which type of trust is best suited to accomplishing your specific goals, see
other types of trusts for a comparison of different types of estate planning trusts.
Advantages of Spendthrift Trusts
The following is a list of some of the advantages of a spendthrift trust:1. A spendthrift trust is a good way to provide lifetime income or financial support to a beneficiary that lacks the ability to manage money or property. Depending on the heir, it may be a good idea to avoid leaving a lump sum inheritance.2. A spendthrift trust can be a way to protect the assets of a beneficiary that has claims against their property and income due to lawsuits, alimony, medical bills, and other unpaid debts.3. The beneficiary of a spendthrift trust is prohibited from selling, assigning, transferring or pledging the trust assets so it provides the grantor or settlor some assurance that the beneficiary’s financial needs may be met for a longer period of time.4. Because assets passed to a beneficiary through a trust avoid the public process of probate, the inheritance you leave for your children in this type trust should be more private than if those same assets passed via a will. See
more about trusts.
Can Creditors Attach a Beneficiary's Interest in a Spendthrift Trust?
While creditors generally cannot attach a beneficiary’s interest in a spendthrift trust, there are some exceptions, and the exceptions vary based upon state law. Many states allow creditors to attach a beneficiary’s interest in a spendthrift trust to pay awards of alimony, child support, IRS obligations, and debts owed to creditors that supplied food, housing or other basic living necessities to the beneficiary. For details on when a creditor can collect against a beneficiary's interest in a trust and sample spendthrift trust language, see debts trust beneficiary.These types of creditors typically can only attach the income the beneficiary receives from the trust and cannot attach the trust principal unless the beneficiary is given access to the trust principal. However, some courts have also allowed the trust principal to be attached in some cases. It is important to review state laws to understand the protections a beneficiary of a spendthrift trust may be afforded in your state. If one of your objectives in making a trust is to ensure debt collectors cannot access funds placed in trust for your child or another beneficiary, an estate planning lawyer may be able to recommend states that offer legal advantages on this issue.Different rules apply to self-settled spendthrift trusts. Refer to the separate section on this page regarding self-settled spendthrift trusts.
How to Set Up a Spendthrift Trust
Spendthrift trusts are complex instruments that must be properly drafted, funded, and administered to be enforceable and accomplish the goals of the person making the trust. If you are considering using a spendthrift trust as part of your estate plan or for asset protection purposes, consult an attorney. Do not attempt to create a spendthrift trust without a lawyer. For tips, go to finding an attorney.The transfer of property to a spendthrift trust for the benefit of a beneficiary, whether as a gift or an inheritance, can have tax ramifications. Before making a spendthrift trust, consult a tax advisor.
Deciding Whether to Establish a Spendthrift Trust for Your Child, Grandchild or Partner
Many parents today are facing the dilemma of how to pass the property they have accumulated over a lifetime to children who are simply imprudent with money. If you have an adult child or grandchild who thinks a money tree grows in your backyard, you may have concerns about how he or she will survive after you are gone.The sad truth is that regardless of how large an inheritance you bequeath to some children, it will never be enough to provide them financial security. If you have a relative that has come to expect loans or gifts from you to help them get by, there is little chance of them changing their spending habits in the future. Perhaps the only way to provide them some measure of financial stability is to control the amount of income they have access to at one time.If you prefer to create an arrangement in which one or more of your heirs receives an inheritance in the form of monthly or annual payments for a period of years or for life, you may want to consult an attorney about using a spendthrift trust in your estate plan. By using this type of trust, you can ensure that a child, grandchild, sibling, parent or other heir receives a stream of payments that will help him or her over a longer period of time instead of being given an entire inheritance with no limitations. Depending on the size of your estate, a spendthrift trust may also allow you to pass some of your property to your grandchildren or a favorite charity, by directing that the trust principal shall pass to a remainder beneficiary upon the death of the original beneficiary. See
charitable remainder trusts.Updated August 16, 2017.