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How Does a Spendthrift Trust Work?

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.

Sometimes families need to recognize that despite all of their efforts, some of their members simply cannot be trusted with the family money, says Newsday’s recent article, “What to consider when creating a ‘spendthrift’ trust.”

If a family member has a drug or gambling problem, a spouse who may not be looking out for their best interests or they are simply bad with money, 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.

The beneficiary might get trust benefits as regular payments or need to ask 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 maybe even the interest.

This restriction protects trust property from a beneficiary who might waste the money, and also the beneficiary’s creditors.

Remember these other items about asset protection trusts:

  • Be sure that you understand the tax ramifications of a spendthrift trust.
  • 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 down 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’s substantially higher than an individual rate.

It’s critical that you choose your trustee carefully. You may even think about going with a professional corporate trustee. Here’s just one situation that could arise: the beneficiary could have legitimate needs and the trustee might refuse to give them the money, based on a history of bad decisions.

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”

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