What is a Spendthrift Provision?
Living trusts are often used in estate planning because the transfer of assets from the trust to its heirs is more expeditious and efficient than transfers by will. Additionally, the transfer of assets is done without the cost of probate and provides the creator of the trust or “grantor” with privacy of the nature and value of those assets.
Many grantors will include a clause in their living trust known as a “spendthrift provision” which limits access to assets on the part of a beneficiary or their creditors. Simply put, this type of clause prevents beneficiaries from squandering their inheritance before they have even received it. Beneficiaries can’t give away or take loans out against the assets they’ll receive from the trust. A spendthrift provision also protects the inheritance from creditors.
In many cases spendthrift clauses are coupled with other trust provisions concerning the distribution of assets to beneficiaries; for example, instead of a lump sum, the assets would be distributed in monthly payments.
Do you need one?
Estate planning is all about planning ahead to ensure that your assets are distributed to your designated beneficiaries according to your wishes. However, you may have family members who lack financial responsibility. For example:
- Proven inability/unable to appropriately manage their finances,
- Presence of significant debt and many creditors,
- Struggles with substance abuse,
- Disability that prevents them from being fiscally responsible.
What is to prevent them from squandering the assets inherited from your estate after your death?
Adding a spendthrift provision to your living trust can protect your beneficiaries from themselves and others who want to take advantage of their good fortune.
Think about your trustee
A living trust trustee is in charge of the funds in the trust and is responsible for distributing them to the beneficiaries according to the terms of the trust. If your living trust includes a spendthrift provision along with a staggered distribution provision for monthly or annual payments, the trust will have to remain open for a number of years until all assets have been distributed to a beneficiary.
A prolonged management of the trust creates additional work for your trustee who will be tasked with not only managing the assets remaining in the trust, but also dealing with financially irresponsible beneficiaries which could become quite stressful.
Therefore, it’s important to consider this when deciding about adding a spendthrift provision to your living trust as well as who is going to be your trustee.
At the Law Office of David W. Foley, experienced trust administration attorney, we’ll explain the advantages and the drawbacks of spendthrift provisions and help you create a living trust that will protect your “financially vulnerable” family members.