Newsday’s recent article, “What to consider when creating a ‘spendthrift’ trust,” explains that a spendthrift trust protects people from themselves. A spendthrift trust can be a great option for families who have children or other beneficiaries with an substance-abuse issue, a gambling problem, or even a person who’s married to a wild spender. In some cases, spendthrift provisions can be inserted into a traditional living trust as well.
This type of trust or provision—also called an “asset protection trust”—gives an independent trustee the power to make decisions as on how to spend the funds in the trust. Thus it is very important to select a trustee in whom you have complete faith.
The beneficiary might get trust benefits as regular payments or need to ask permission from the trustee to access funds at certain times.
A spendthrift trust is a kind of property-control trust that restricts the beneficiary’s access to trust principal (the money) and maybe even the interest.
This restriction protects trust property from a beneficiary who might waste the money, and also the beneficiary’s creditors.
Remember these other items about asset protection trusts:
- Be sure that you understand the tax ramifications of a spendthrift trust.
- If the trust is the beneficiary of retirement accounts, the trust must be designed to have the RMDs (required minimum distributions), at a minimum, flow through the trust down to the beneficiary.
- If the trust accumulates the income, it could be taxable. In that case, the trust would have to pay the tax at a trust tax rate. That’s substantially higher than an individual rate.
It’s critical that you choose your trustee carefully. You may even think about going with a professional corporate trustee.
If the wrong trustee is selected, he or she could keep the money from the beneficiary, even when the beneficiary legitimately needs it. A spendthrift trust isn’t necessary in every family, but it is perfectly suited to families with concerns about some of their beneficiaries.
Reference: Newsday (June 23, 2019) “What to consider when creating a ‘spendthrift’ trust”