Add a spendthrift provision to limit a beneficiary’s access to an inheritance.
Spendthrift trusts can offer asset protection from a beneficiary’s creditor and limit how much the beneficiary receives
A spendthrift trust operates like a normal trust, but includes a spendthrift clause or spendthrift provision
The trustee is responsible for managing the trust funds and disbursing payments
As you get older and start planning for the future, you may start to think about who should inherit your belongings when you die. But what if the family member or loved one you want to pass an inheritance to isn’t so good at managing their finances? If you’re afraid that a future heir will squander away the money you diligently saved for them, you might consider opening a spendthrift trust. This type of trust protects a financially irresponsible beneficiary by limiting their access to the trust funds. With a spendthrift trust, you include a provision that dictates how much and even when a beneficiary receives any payments from the trust. A trustee will be responsible for making these distributions and managing the trust according to your terms, making a spendthrift trust ideal if you have a financially risky beneficiary.
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A trust is a separate legal entity that holds different types of assets for the intended benefit and use of its heirs, called beneficiaries. The grantor or settlor is the person who creates the trust and puts assets into it.
The grantor (settlor) makes all the rules about the trust, which are contained in the trust document. If you open a spendthrift trust, instead of bequeathing a lump sum to your beneficiary, you will have the trust pay out the money incrementally. These terms are laid out specifically in a provision that limits how much and how often the beneficiary receives payments from the trust and in what circumstances. For example, does the trust make monthly payments to the beneficiary? Quarterly? Only on birthdays?
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To make sure the spendthrift clause is drafted in proper legal terms, you can seek the legal advice of a professional like an estate planning lawyer.
The grantor (settlor) also appoints a trustee to manage the trust. The trustee of a spendthrift trust is especially important because they are like a gatekeeper or middleman between the beneficiary and the trust property. If you open a trust during your lifetime (a living trust or inter vivos trust), then you can act as trustee. Just be sure to name a successor trustee to take over when you pass away who can continue managing the trust if you haven’t had the assets distributed already.
The benefit of establishing the spendthrift trust while you’re alive is that the assets are not subject to probate. If you have a spendthrift trust created upon your death through instructions in the will, then your beneficiaries must wait until the probate process is completed before they can receive any of the assets.
You can learn more about wills and trusts here. And if you don't have any children who make poor financial decisions, you'll probably benefit from a revocable trust, instead. Start your estate plan with the Policygenius app and get both a will and trust with the Plus package.
A spendthrift trust can be revocable or irrevocable in nature. A revocable trust is one that can be changed or modified by the grantor. On the other hand, an irrevocable spendthrift trust cannot be changed.
Let’s say you want to leave $1 million worth of assets for your son who is in college, but aren’t quite confident in his ability to manage his finances. You transfer the assets into a spendthrift trust and designate your son as the trust beneficiary, specifying that he receives only $1,000 a month on the first of every month, which increases annually on his birthday.
Additionally, you allow an estate planning attorney who you appointed as trustee to make extra payments to your son only in the case of a medical emergency and hardship and to disburse all remaining trust funds to your son when he turns 40.
Consider the spendthrift trust in following situations:
He overspends his monthly allowance for the week and wants to go on a vacation — He must wait until the next month to receive any money from the trust.
He runs out of money, but needs to pay for ankle surgery — The trustee can give him money because it falls in accordance with the trust terms.
He falls into credit card debt and faces debt collection — The millions in the trust are protected from the creditor’s claim.
He has a car accident and the other driver sues him — Assets in the trust are protected in the event of a lawsuit.
He buys a house but defaults on his mortgage payments — the lender cannot come after the remaining trust funds, which he hasn’t yet received.
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Elissa Suh is a personal finance editor at Policygenius in New York City. She has researched and written extensively about finance and insurance since 2019, with an emphasis in esate planning and mortgages. Her writing has been cited by MarketWatch, CNBC, and Betterment.
Elissa has a B.A. in Film Studies from Barnard College.
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