How can a spendthrift trust protect my heirs from creditors?
With a spendthrift trust, you can pass down assets to your heirs without concern that your assets may be rapidly spent by heirs or seized to satisfy creditors. A spendthrift trust comes with all of the benefits of a regular trust, but allows for additional protections. This type of trust is particularly useful for parents or grandparents who want to leave assets to their children or grandchildren, but they have concerns about the spending habits of these heirs. Our California estate planning attorneys explore the many benefits of spendthrift trusts below.
What is a Spendthrift Trust?
A spendthrift trust is a type of trust overseen by a trustee. The trustee could be a named individual or a corporate trustee who is charged with controlling the assets within the trust. Upon your death or prior to it, the trust will become irrevocable. Beneficiaries to the trust are forbidden from spending the money within the trust until they receive allocated distributions. As the trust creator, you have the power to determine what payments will be made to beneficiaries and when.
For example, you could allow your trust with a value of $5 million to distribute $200,000 annually to your child. Your child would only be eligible to receive the allocated $200,000 each year. He or she would not be allowed to use the trust as collateral for a loan and should your child end up in debt, creditors could not touch the assets within the trust itself. Creditors could only come after the $200,000 already distributed to your child.
Spendthrift trusts come with some flexibility. For instance, you may wish to put provisions in the trust that would allow for larger distributions should a beneficiary need funds for educational costs and other extraordinary expenses. Your attorney will help you to structure the trust so as to protect your heirs and your assets.
Creating a Spendthrift Trust
Spendthrift trusts are made in the same manner as a regular trust. These trusts are distinguishable because they contain a specific spendthrift provision within them. Like an ordinary trust, a spendthrift trust is created through an agreement wherein assets are transferred into the name of the trust for the benefit of the beneficiaries. Your attorney will further advise you as to whether a spendthrift trust is the right option for you and your heirs.