If you’re considering how to best safeguard your assets and ensure they are used according to your wishes after you pass away, a spendthrift trust might be a valuable estate planning tool to consider.
At the Law Offices of Brenton C. McWilliams, we recognize that estate planning is a deeply personal process, and what works for one family may not be the best solution for another. Our team is here to understand your goals and help you determine if a spendthrift trust aligns with your needs.
How Does a Spendthrift Trust Work?
A spendthrift trust is a type of irrevocable trust designed to protect assets from being misused by the beneficiary or accessed by the beneficiary’s creditors. When you create a spendthrift trust, you appoint a trustee to manage the assets held in the trust. The trustee is responsible for distributing funds to the beneficiary according to the terms you set forth in the trust agreement.
One of the key features of a spendthrift trust is the spendthrift provision, which restricts the beneficiary’s access to the trust funds. This means the beneficiary cannot pledge the trust assets as collateral, assign their interest in the trust to someone else, or compel distributions from the trust.
Additionally, the spendthrift clause protects the trust assets from the beneficiary’s creditors. If the beneficiary incurs debts or is sued, the creditors generally cannot reach the assets held in the spendthrift trust. This is because the assets belong to the trust itself, not the beneficiary.
Benefits of a Spendthrift Trust
There are several benefits to including a spendthrift trust in your estate plan:
- Safeguarding assets from creditors: As mentioned, a properly drafted spendthrift provision can protect the trust assets from the beneficiary’s creditors, ensuring the funds are used according to your wishes.
- Protecting the beneficiary from irresponsible spending: If you’re concerned that your beneficiary might squander their inheritance or has a history of poor financial decision-making, a spendthrift trust can help by limiting their access to the funds and providing structured distributions over time.
- Incremental distribution of funds: With a spendthrift trust, you can specify how and when the funds should be distributed to the beneficiary. This can help ensure the assets last longer and are used more responsibly.
- Peace of mind: Knowing that you’ve taken steps to protect your hard-earned assets and provide for your loved ones can provide significant peace of mind.
Who Should Consider a Spendthrift Trust?
A spendthrift trust might be a good fit for you if:
- You want to leave an inheritance to someone who has a history of reckless spending or poor money management.
- Your beneficiary struggles with substance abuse, gambling, or other issues that could lead to financial problems.
- You’re worried about your beneficiary’s ability to handle a large lump-sum inheritance responsibly.
- You want to protect your assets from your beneficiary’s potential future creditors, such as an ex-spouse or business creditors.
How to Create a Spendthrift Trust
To set up a spendthrift trust, you’ll need to work with an estate planning attorney who can draft a trust agreement that meets your specific needs and complies with Alabama law. Your attorney will guide you through the process of:
- Naming a trustee to manage the trust assets. This should be someone you trust to follow your instructions and act in the best interests of the beneficiary.
- Transferring assets into the irrevocable trust. This may involve retitling property, updating beneficiary designations, and other legal tasks.
- Specifying the terms of the trust, including how and when distributions should be made to the beneficiary.
It’s important to note that you can also include a spendthrift provision in a revocable living trust, which can provide similar protections while allowing you to retain control over the assets during your lifetime.
Spendthrift Trust Limitations and Considerations
While spendthrift trusts can be powerful tools, there are some limitations and considerations to keep in mind:
- Certain debts, such as child support, alimony, and federal tax liens, may still be able to access trust funds, even with a spendthrift provision in place (Alabama Code § 19-3B-503).
- For the spendthrift provision to be effective, the trust must be properly funded. If you fail to transfer assets into the trust, they won’t be protected.
- Spendthrift trusts are irrevocable, which means the terms cannot be easily changed once the trust is established. It’s crucial to work with an experienced attorney to ensure the trust is set up correctly from the start.
Safeguard Your Legacy with a Spendthrift Trust
At the Law Offices of Brenton C. McWilliams, our team is here to help you explore your estate planning options and determine if a spendthrift trust is the right choice for your situation. We understand that every client has different needs and concerns, and we’re dedicated to providing personalized, compassionate guidance every step of the way.
If you’re ready to take the next step in safeguarding your assets and providing for your loved ones, we invite you to call our office to schedule a conversation. Together, we can create an estate plan that protects your legacy and gives you the peace of mind you deserve.