What Is a Spendthrift Trust?

How Does It Work? Why Is It Used?

A trust can have many purposes. A common one is to keep property out of an estate so that it won’t be subject to probate. Another is to protect assets from creditors. A trust can also be an effective tool for the management of an individual’s assets when that person lacks the capacity to manage their own affairs, either because of age, mental health, or other infirmity.

A parent, guardian, or donor can set up a trust to place limits on the use of assets when a recipient has a history of making poor financial decisions. When a trust is created and implemented for that purpose, it’s commonly referred to as a “spendthrift trust.”

What Is a Spendthrift Trust?

A spendthrift trust is a type of trust that limits a beneficiary’s access to property, typically monetary assets. When the grantor (person creating the trust) sets up the trust, they transfer property into the trust, turning ownership of the property over to the trust beneficiary. But the beneficiary does not have full access to the property. The trust document names a trustee, who oversees access to the trust property in accordance with the terms set forth in the trust.

How Does a Spendthrift Trust Work?

In most instances, a spendthrift trust allows the trust beneficiary some limited access to any interest or earnings of the trust property but prevents access to trust principal. For example, a trust may hold investments that generate income in the form of dividends or interest. Pursuant to the terms of the trust, the beneficiary commonly has limited access to spend the income but does not have the authority to sell the investments or pledge them as collateral. It’s fairly common for a spendthrift trust to provide for regular, periodic payments, or regular distribution of property from the turst, though the trustee typically has the discretion to limit those disbursements.

When Might a Person Set Up a Spendthrift Trust?

The primary purpose of a spendthrift trust is to protect assets from reckless or careless dissipation or waste. As a general rule, the spendthrift trust is most effective when the person to whom the property would normally be given lacks the discipline or mental capacity to avoid squandering the property. Common examples include:

• Minors who have no experience managing money or who might be subject to undue influence, duress, or misrepresentation by others
• Elderly persons showing signs of memory loss, dementia, or a lack of understanding of financial matters
• Anyone with a history of addiction who might waste trust assets
• Anyone with a history of profligate spending

What Is the Role of the Trustee of a Spendthrift Trust?

The powers of the trustee are set forth in the trust document. While there are no specific provisions that must always be included, among the issues routinely addressed in a spendthrift trust are these:

• How extensive will the trustee’s control of trust assets be? Will all the financial needs of the beneficiary be provided by the trust? If so, how will the beneficiary obtain goods and services? Will the trustee advance funds for goods or services, pay the providers directly, or reimburse the beneficiary for permissible expenses?
• To the extent that regular payments or distributions are made, when should they be made, and how should the amount be determined? Will payments be made in fixed amounts, or as a percentage of either principal or interest? Can the trustee elect not to make a payment? If so, under what conditions?

How Can You Create Spendthrift Trust?

A spendthrift trust is, almost by necessity, a complex legal document. You’ll want to hire an experienced trusts and estates lawyer and carefully explain your objectives to them.