Estate planning is a must when you have children; we understand how important it is to ensure your children are financially stable after your death. Trusts can help preserve your wealth, avoid probate, and save on estate taxes. However, one of the concerns you may have is a child, regardless of age, who seems incapable of managing their own money. Whether it is poor spending habits, running up high debt, or other forms of mismanagement, you do not want them wasting their inheritance. One option you have in these cases is a spendthrift trust.
What is a Spendthrift Trust?
Any trust may contain a spendthrift provision; specifying when funds may be removed, and under what conditions and specifying the beneficiary who is to be under the spendthrift provision. However, a spendthrift trust may also be a standalone trust maintained for the benefit of a specific person. Spendthrift trust should be irrevocable, and be controlled entirely by the trustee. These types of trust can prevent most creditors from attaching the principal amount of the trust.
Preserving Assets in a Spendthrift Trust
To ensure the assets are preserved, the income, and interest on the assets in the trust should remain in the trust. Distributions should only occur when the beneficiary requests a distribution, and such distribution is approved by the trustee. The maker of the trust may set conditions for distribution, including maximum amounts to be distributed on an annual basis.
How Spendthrifts Protect Against Creditor Claims
Spendthrift trust provisions may limit distributions to the beneficiary. For example, the trustee may be authorized to distribute assets for education or healthcare expenses, necessary living expenses, or other specific needs of the beneficiary. Because the income is distributed in limited amounts to the beneficiary, and a spendthrift trust should contain provisions that do not allow a creditor to seize the assets, creditors are unable to place a lien against the assets in the trust.
Creditor Claim Exceptions
There are always exceptions where a creditor claim cannot be denied, even by placing assets in a spendthrift trust. There are some creditors who may be able to use the income from the trust to satisfy debt. For example, the IRS may seize income to satisfy a federal tax lien, or the state of New York may seize income to satisfy child support or alimony payments. Another important exception is a creditor who had obtained a judgment; they have the ability to collect 10 percent of the income of the trust until such time as the judgment is paid in full. Additionally, some creditors may have the right to a claim against income of the trust that exceeds the needs of the beneficiary; but they do have to do this through the courts.
Role of Trustee of Spendthrift Trust
The trustee maintains full control over the assets of the trust, including any income earned from the assets. This means they have a fiduciary obligation. This fiduciary obligation means the trustee must act in the best interest of the beneficiary, even when the beneficiary does not agree with their decision. The trustee also has the obligation to follow the terms of the trust; for example, if the maker of the trust specifies a specific dollar amount is the maximum that may be distributed in one year, or that the trust be dissolved after certain milestones, or a specific time period, the trustee must follow these provisions.
Importance of Proper Drafting of a Spendthrift Trust
Spendthrift trusts must contain specific language to limit the possibility a creditor can access the income from the trust. Additionally, the trustee may be given specific instructions about how income can be reinvested, how much income may be distributed and place other restrictions on the trust. This means you need to work closely with an experienced estate planning attorney who understands the language that is needed in a spendthrift trust.
Families who are concerned about the financial choices their adult beneficiaries are making, or may make, want to ensure they have financial stability. One way to ensure this is through a spendthrift trust. Contact The Levoritz Law Group for help with all your estate planning needs and for help preparing a spendthrift trust.