Common Reasons for Setting up a Spendthrift Trust

BY: Law Offices of Andrew Cohen | October 6, 2022

Setting up a trust serves many purposes. Preserving your legacy and ensuring your loved ones (and other important people in your life) receive inheritances are two noteworthy examples.

However, it’s important to consider certain factors when determining what type of trust to establish. For instance, perhaps you want to leave assets to a loved one, but you have reason to fear they will not manage their inheritance responsibly.

This doesn’t mean your only option is to deprive them of assets you wish them to inherit. Instead, you can set up a spendthrift trust.

What is a spendthrift trust

When you establish a spendthrift trust, you are known as the grantor. The property you place into the trust is referred to as the principal.

The beneficiary is the individual to whom you are leaving the property which you’ve placed in a trust. However, with a spendthrift trust, the beneficiary cannot access the principal themselves, nor can they promise it to anyone else. Instead, they must access the principal through a trustee.

The trustee is someone you appoint to manage a trust and the principal according to your wishes. The trustee may provide the beneficiary with the benefit of the trust in the form of regular payments or other such means according to your specifications.

There are a number of potential reasons you may decide to establish a spendthrift trust. The following are common examples:

Protecting assets

You’ve worked hard to acquire assets and property over the course of your lifetime. You don’t want to have to worry that someone to whom you leave a certain property will squander it. This isn’t a concern you need to have if you leave them property via a spendthrift trust.

Protecting assets and property from creditors

A person for whom you’re creating a spendthrift trust is likely someone who makes poor financial decisions. If you have good reason they will go into debt, establishing a spendthrift trust ensures that their creditors will not be able to seize the property in the trust, because the beneficiary won’t have direct access to it. This can also prevent a beneficiary from rashly deciding to use the property in a trust to pay off outstanding debts.

Accounting for a beneficiary’s limitations

Although it’s common for someone to establish a spendthrift trust when leaving assets to those who may be financially irresponsible due to immaturity, addictions, or other such factors, there are also instances when certain limitations can prevent a beneficiary from making smart financial decisions.

Perhaps a loved one is naive, young, or mentally incapacitated in a manner that makes them an easy target for fraud. With a spendthrift trust, you could leave them property without worrying their limitations will result in them jeopardizing it.

Just be aware that this isn’t an exhaustive list. If you’re thinking about setting up a spendthrift trust, it’s best to discuss this topic in greater detail with a legal professional. A Santa Clarita estate planning attorney at the Law Offices of Andrew Cohen can help you better understand if this is the ideal option for your goals. Learn more by contacting us online or calling us at 661-481-0100.

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