If you want to support a relative who is bad with money or has creditors, then you should consider forming a spendthrift trust. This type of trust provides income for a beneficiary within limits while protecting the trust assets from creditors.
What Is a Spendthrift Trust?
In a spendthrift trust, a trustee has nearly full control over when to give a beneficiary money from the trust and how much to give him. Often people form spendthrift trusts when they have relatives who spend all their money when they have it but cannot hold down a job, or they otherwise need support.
The trustee of a spendthrift trust has broad discretion to make distributions to the beneficiary when, in the trustee’s view, the distributions are necessary for the beneficiary’s support or basic needs. The beneficiary has no ability to access the trust’s principal (the original money or assets that the creator placed in trust). Usually payments come from income or interest earned on the principal.
How Do Spendthrift Trusts Provide Protection from Creditors?
Because beneficiaries cannot reach trust principal and have no decision-making power about when to make distributions from the income or interest, creditors usually cannot reach trust assets to satisfy a beneficiary’s debts. This creditor protection is one of the primary reasons that people create spendthrift trusts, because people who are bad with money usually have creditors. The protection is not infallible. In some limited circumstances, creditors could access trust money – as if a creditor is pursuing a debt for basics such as food or shelter.
Many spendthrift trusts are irrevocable – the trust creator cannot change the trust terms after it begins operating. Assets held in irrevocable trusts are usually not part of the trust creators’ estates, so creditors of a trust creator cannot access the funds after the creator passes away.
Are There Alternatives to Spendthrift Trusts Available?
If you want to give money to a relative with poor saving habits, you may have other options. Some families opt to form “special needs trusts” (SNTs) for relatives with special needs or disabilities who receive government benefits. Being a beneficiary of an SNT does not count against asset and income limits that are required for government benefits recipients.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.