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Spendthrift trusts are trust accounts that have an appointed trustee over them to oversee the distribution of the assets that are left after you have passed away. The beneficiary of a spendthrift trust can’t spend the money in the trust until it has actually been distributed to them. Assets that are held in a spendthrift trust can’t be used as collateral nor can they be touched by creditors the beneficiary has or may have in the future. The assets of the funds are safe, and only the distributions can be touched.
Contrary to what its name sounds like, spendthrift trusts are not only for those who have poor spending habits, but it is a very good use for this type of trust. If a beneficiary isn’t known to make smart money decisions, a spendthrift trust protects them from themselves in essence, ensuring that they have money for their future.
It’s easy to get caught up in a buying frenzy when you get a lump sum of money, so by having this type of trust in place, there is security in the future of the trust as well as stability for the beneficiary as well. When you set up a spendthrift trust, you can either choose to have the money dispersed at the discretion of the trustee, or decide ahead of time on an amount to be dispersed each year from the trust.
The later type of set up is much less “hands on” for the trustee since once the funds are distributed, the trustee doesn’t have to do anything else. With the first type of account, the trustee could possibly be in a position to be asked for money at every whim the beneficiary may have.
The trust creator can decide if the money is to be distributed yearly, every month, or quarterly. The terms are up to the one creating the trust. Depending on the spending habits and responsibility of the beneficiary, this would help the trust creator decide which would be the best for the beneficiary.
For example, if the trust is for a young person, having money dispersed monthly might be better for teaching them to budget wisely rather than give them a larger lump sum at one time and risk them spending it all well before the next distribution.
Although most creditors can’t touch the money in a spendthrift trust, there are some exceptions to that rule. If the beneficiary owes IRS taxes, they might take the funds from the trust, as well as alimony or child support payments if the beneficiary is in arrears on their payments.
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