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Spendthrift Trusts Protect the Financially Challenged

Posted on 09 Jun 2011 by admin | Filled under: uncategorized

If you want to leave money to a friend or family member when you die, but are worried about their financial acumen, you might want to consider establishing a spendthrift trust.

A spendthrift trust protects people who may be mentally incapacitated or who may waste money by establishing a trust overseen by someone (a trustee) who controls the funds. The beneficiary cannot spend the money before getting a distribution. For example, if the terms of the trust say the beneficiary gets $100,000 per year, that is all he/she gets from the trust. There may be other stipulations such as distributions cannot be made until the beneficiary reaches 18, 25, 40 years old, etc.

The trustee also authorizes what payments can be made from the trust. This is to protect it from creditors. Creditors who supply the beneficiary with "necessaries" however--food, shelter, clothes, transportation—can usually receive payment from the trust. The trusts can also be tapped for payment of alimony and child support.

To be a spendthrift trust, it must be an irrevocable trust that contains a spendthrift provision. Sometimes just mentioning the word "spendthrift" in the document is enough. Irrevocable trusts can also contain a spendthrift provision to protect it from creditors, even though the beneficiaries are not spendthrifts.

Generally, people cannot set up spendthrift trusts to shelter themselves from creditors. In other words, a creator of a trust cannot also be the beneficiary. This is to prevent against fraud to creditors. Some states have enacted laws that allow self-settled spendthrift trusts, however, where you can protect yourself from creditors. Indiana is not one of those states.

If you are interested in establishing a spendthrift trust, contact an estate planning attorney who can help you plan for those you love.