Protect Your Heirs From Themselves With a Spendthrift Trust
If you want to leave assets to an heir, but are worried that he or she may not use the assets wisely, or might lose the assets to creditors, you may benefit from setting up a spendthrift trust. But, before we discuss how a spendthrift trust can protect your heirs from themselves, and from their creditors, let’s first review some trust terminology:
- A Trust – A legal arrangement in which a Grantor engages a Trustee to hold and manage assets for the Beneficiary or Beneficiaries of the trust arrangement.
- Grantor – The person who creates a trust and transfers property into the trust. For instance, you will be the Grantor of a trust that you create to hold your assets.
- Beneficiary – The person who benefits from the trust arrangement. This could be your spouse, child, grandchild, or even your favorite charity.
- Trustee – The person or entity that the Grantor has appointed to manage the trust property per the terms of the trust agreement. The Grantor is often the Trustee of the trust he or she creates. Then, when the Trustee dies or becomes incapacitated, a previously designated Successor Trustee steps in to fill the role.
- Trust Agreement – A legal document drawn up by the Grantor and their attorney that contains the terms by which the Trustee must manage the trust assets.
- Trust Principal – The property held in the trust. This is in contrast to the trust income, which is usually distributed to the Beneficiaries of the trust per the terms of the trust agreement.
What is a Spendthrift Trust?
A spendthrift trust is a trust that restricts a Beneficiary’s access to the trust principal. This protects the trust principal from a Beneficiary that may misuse the trust assets or lose them to creditors. With a spendthrift trust, the Beneficiary is expressly prohibited from accessing the trust principal or assigning it to any other person or entity.
The Beneficiary of a spendthrift trust can only receive distributions from the trust in the form of payments made by the Trustee (per the terms of the trust agreement) or in the form of goods or services paid for by the Trustee from the trust funds.
The advantage here is that since the Beneficiary has no access to the trust principal, neither do creditors. This essentially protects the trust principle from being abused by the Beneficiary and from being taken to satisfy their debts.
When is a Spendthrift Trust Beneficial?
A spendthrift trust is most beneficial when you want to leave money or assets to an heir, but are afraid that they might squander the gift if they inherit it without any restrictions. Common reasons to set up a spendthrift trust are as follows:
- To provide for a Beneficiary who is not good with money;
- For a Beneficiary who struggles with addictions that may cause them to squander their inheritance;
- To protect a Beneficiary who may easily be deceived or defrauded; and
- To protect assets on behalf of a Beneficiary who is prone to lawsuits, creditor actions, and bad relationships.
In each of these scenarios, a spendthrift trust can allow you to provide for a Beneficiary without the risk of the trust principle being misused, wasted on drugs, alcohol, or gambling, or lost to lawsuits, liens, misguided relationships, or excessive debt.
A spendthrift trust is especially useful if you have a larger family with several children who will rely on the trust principle. In this case, the last thing you want is for one child to endanger the trust principle and the welfare of all of your other children.
Contact an Experienced Virginia Estate Planning Attorney
For more information about how a spendthrift trust can be used to protect your heirs from themselves, contact our law firm to speak with a knowledgeable Virginia estate planning attorney. We will evaluate your circumstances and what you hope to achieve, and let you know if setting up a spendthrift trust is right for you. Call us today at (703) 553-2577 or use the contact form on our website to arrange a consultation.
The information on this site is for general informational purposes only. The information presented in this site is not legal advice or a legal opinion. You should seek the advice of legal counsel of your choice before acting upon any of the information in this site.