What is a spendthrift trust?
Properly speaking, there is no such thing as a spendthrift trust, at least if we go by legal definitions. There are all manners of different trusts such as an insurance trust, charitable remainder trust, living revocable trust, children’s trust, and so on, but spendthrift trust is not one of them.
Well, that is for the technical side of the things. In lay jargon, a spendthrift trust is any trust that contains a spendthrift provision in it. Normally, the provision is put in the way of a spendthrift clause included within the terms of the trust and this clause may not take more than one or two short paragraphs inside a trust agreement that is, say, thirty pages long.
So, to sum it up, any trust that includes a spendthrift clause within its terms can be called a spendthrift trust. Now, as for the benefits of it, this kind of trust acts as a great and unique tool when you want to preserve your wealth and property and pass it on to your heirs in a responsible manner.
Why draft a spendthrift trust?
Well, you must know what a spendthrift is—someone who is too generous with his money and assets. To put in less flattering terms, someone who acts rather irresponsibly, sometimes outrageously so, with the money he has in his hand or can lay his hands on. And if your heir is such a person, you’ll want to keep your family’s money safe and will want to make sure that it’s not drained out all too quickly. Moreover, a spendthrift trust keeps the money safe not only from the heirs or the beneficiaries but from the creditors as well.
For purposes of illustration, let’s say that you have left $3,000,000 in net assets to your beneficiary. However, according to the trust agreement, the trustee is to pay the beneficiary a pre-arranged amount of $200,000 annually. This means that the beneficiary cannot tap into his beneficial interest until he finally receives the distributions, in accordance with the terms of the trust.
The same goes for his creditors. The beneficiary is not allowed to pledge his trust assets or beneficial interests as collaterals. However, if he happens to take out a loan and defaults on it, his creditor will not be able to go after his trust assets to get his money back—again, not until the assets are distributed. For the time being, all that the creditor can lay claim to, apart from any personal assets that the beneficiary may own, is that $200,000 that the beneficiary receives from the trust.
Additionally, if the spendthrift clause mentions that the spouse of the beneficiary cannot lay any claim to or control in any manner the funds of the trust, the said spouse cannot in any way benefit from the trust assets. For instance, in case of a divorce, the ex of the beneficiary will not be able to receive any form of allowance or child support, etc. if it requires funding from the trust assets.
Sometimes, it happens that a not too alert creditor may approve a loan to someone he knows to be a beneficiary of a wealthy estate. But when there is a spendthrift provision included in the trust and if the said beneficiary is not able to pay back his loan, the creditor will be simply out of luck!
What about self-designated spendthrift trust?
So now that we know ‘what is a spendthrift trust’, it may make many curious about whether a spendthrift trust will protect the grantor himself from his creditors. Well, the answer is simply, NO. As long as the grantor is alive and the trust is a revocable one (or even if it is an irrevocable one), the spendthrift clause in a trust will not protect your assets from your creditors.