There are many different kinds of trusts, including ones designed to safeguard an inheritance. The spendthrift trust is a good tool in the estate planning toolbox for individuals who, for whatever reason, can’t manage money.
In planning for your family upon your passing, you may recognize that despite all of your efforts, some family members simply need help in managing family money, says Newsday’s recent article, “What to consider when creating a 'spendthrift' trust.”
This can happen if a family member has an addiction or gambling problem, a spouse who may not be looking out for their best interests, a difficult divorce, or they are just cannot handle their money wisely, this type of trust may be a solution.
A spendthrift trust—also called an “asset protection trust”—gives an independent trustee the power to make decisions as on how to spend the funds in the trust for the benefit of the distributes.
The beneficiary of this type of trust can get trust benefits as regular payments, like an annuity, or may be set up to allow the trust beneficiaries to ask for permission from the trustee to access funds at certain times.
A spendthrift trust is a kind of property control trust that restricts the beneficiary’s access to trust principal (the money) and income by giving the trustee the rules for distribution and discretion about extra expenditures.
This restriction protects trust property from a beneficiary who might waste the money, or allow these funds to be subject to beneficiary’s creditors.
In planning, consider these other issues about asset protection trusts:
- Understand the tax ramifications of a spendthrift trust who will be liable for the income tax.
- If the trust is the beneficiary of retirement accounts, the trust must be designed to have the RMDs (required minimum distributions), at a minimum, flow through the trust to the beneficiary.
- If the trust accumulates the income, it could be taxable. In that case, the trust would have to pay the tax at a trust tax rate. That is substantially higher than an individual rate.
Consult with your attorney and tax accountants in these issues.
It's critical that you choose your trustee carefully. They must be able to work well with the beneficiary and carefully manage their expectations and encourage their cooperation. You may think about using a professional corporate trustee to achieve independence especially when the beneficiary has legitimate needs and the family trustee might refuse to give them the money, based on a history of bad decisions. This eliminates the risk of judgments.
Your estate planning attorney can help you work through the trustee selection process, as well as creating the trust.
Reference: Newsday (June 23, 2019) “What to consider when creating a 'spendthrift' trust”