Spendthrift Trusts
As you consider who you might leave money to when you pass away, you may hesitate to include certain loved ones with poor spending habits or addiction problems. If this describes someone you may include in your estate plan, establishing a spendthrift trust may be right for you.
At The Law Offices of Brian L. Fox, ALPC, we will counsel you on all your options as you develop your estate plan, including whether a spendthrift trust would fit your needs. Working with an experienced estate planning attorney who can advise you on creating a plan tailored to your unique goals will give you the peace of mind you need.
What Is A Spendthrift Trust?
A spendthrift trust is a type of trust in which the trustor limits the beneficiary’s access to the money or assets of the trust. The beneficiary’s creditors are also unable to access the trust assets easily. For example, the spendthrift trust language may specifically state:
The interest of the beneficiary is held subject to a spendthrift trust. No interest in the Trust Funds established pursuant to this Agreement will be transferable or assignable.
Although there are other ways in which a spendthrift clause may be worded, the language must make it clear that the trust is a spendthrift trust. If the trust is improperly worded, the beneficiary’s creditors could seek payment from the funds, or the beneficiary may try to take out more money than is permissible.
Specifically, a properly worded clause will explicitly show that the beneficiary has no say in how the trust funds are handled and distributed. Instead, the trustee must distribute funds in accordance with the trust instructions.
What makes a spendthrift trust a unique estate planning tool? Two characteristics are why so many individuals opt to establish a spendthrift trust:
- Creditors cannot access trust funds or assets
- Beneficiaries cannot give away or take loans from the trust funds or assets
The combination of these benefits and control makes a spendthrift trust an attractive means to protect your estate from the negligent spending of beneficiaries you wish to provide financial security.
When Would a Spendthrift Trust Be Useful?
Although anyone could be a beneficiary of a spendthrift trust, those making estate plans may consider creating a spendthrift trust for loved ones who:
- Do not manage money well and spend unwisely
- Have a disability that interferes with their ability to manage their personal finances
- Suffer from a mental illness that impacts their ability to handle money responsibly
- Have an addiction that affects how they may use the money
At The Law Offices of Brian L. Fox, ALPC, we understand that you desire to help protect the inheritance of your loved one and are happy to explore all of the options with you when building your estate plan.
How Does a Spendthrift Trust Work?
Under California law, the beneficiary of a spendthrift trust receives trust funds in specific increments over time rather than receiving full access to their funds all at once. Your attorney will assist you in determining the best pay structure to address your concerns and intentions for the trust.
How Are the Funds Distributed?
When establishing a spendthrift trust, you may specify how the funds are distributed, which often depends on the size of the trust fund. Options for the pay structure include:
- Dividend-only distributions – For a large trust, you may consider distributing dividends only from the trust’s investment income.
- Annual, quarterly, or monthly distributions – You can choose to have the trust distributed within specific time frames, such as annually, quarterly, or monthly. Under this option, the trust can specify the distribution amount, limiting how much money the beneficiary has at any one time.
- Specified spending — Under this option, you can specify how the trust funds may be used, such as for college tuition or a house down payment. If the trust is structured this way, the trustee can monitor and coordinate the spending.
How to Choose the Trustee of a Spendthrift Trust
The trustee is charged with disbursing the funds in strict accordance with the terms of the spendthrift trust. Because this person usually has complete control over the trust funds and assets, you should designate someone you can count on to properly administer the trust and exercise good judgment. The trustee could be a close friend or family member.
Or, you could appoint a professional trustee, such as a banker, to hold this position. Because a professional trustee is not related to you or the beneficiary, this arrangement may eliminate the possibility of any difficult family dynamics related to the trust and its administration.
What Are the Advantages of a Spendthrift Trust in California?
As discussed above, there are many benefits to establishing a spendthrift trust. Specifically, the advantages to setting up a spendthrift trust include:
- Preventing a beneficiary with poor spending habits from quickly using the bulk of their inheritance
- Protecting the beneficiary’s inheritance from creditors
- Bypassing probate
What Are the Disadvantages of a Spendthrift Trust in California?
Despite the many advantages of using a spendthrift trust, there are some disadvantages you should consider when establishing your estate plan:
- Some debts, including child support, may not be exempt from a spendthrift trust.
- A spendthrift trust is an irrevocable trust, meaning that the trustor cannot amend the trust.
Contact an Estate Planning Attorney in Ventura or Santa Barbara Today
Spendthrift trusts can be more complex than simple trusts. Often, a large estate is involved, and the individual establishing the trust is concerned about the tension between providing for the potential beneficiary’s financial stability and their wasteful spending. As such, it is critical to establish a spendthrift trust that is appropriately structured. Our attorneys will ensure a tailored spendthrift trust fits your unique circumstances and intentions while complying with California law.
At The Law Offices of Brian L. Fox, ALPC, our estate planning lawyers will help you create a spendthrift trust that meets your goals. Contact us today for a confidential consultation to discuss your estate planning needs.
