By Marc A. Smith, J.D.
Spendthrift Clause – What is it?
First, let us explain what a trust is. A trust is a legal contract drafted by an attorney to specify the duties of a named trustee, who will ensure that your assets are managed according to your wishes both during and after your lifetime. Although there are various types of trusts, generally, an irrevocable trust is opened to protect your trust assets from creditors or other threats.
In the irrevocable trust, you direct the trustee to manage your trust assets and distribute them to your beneficiaries in the way you see fit. With a spendthrift clause inserted, you can limit the ability of creditors or your beneficiaries in reaching the pot of money in your trust. Establishing a spendthrift trust can prevent financially unstable beneficiaries from mishandling their inheritance. It can also prevent beneficiaries from withdrawing assets prematurely and limit the collection of judgments and liens against trust assets by creditors.
Instead of giving a lump sum, you can provide a monthly benefit of a specific amount with a Spending Trust. Beneficiaries facing any financial hardship cannot use the trust to repay their creditors, and creditors generally cannot place liens or other judgments against your trust assets.
How Can a Spendthrift Clause Benefit Your Family?
A spendthrift clause can benefit your family by protecting your assets from creditors and ensuring your loved ones will be cared for after your death.
You may also want to insert a spendthrift clause in a testamentary instrument to protect beneficiaries who:
- Might go through a divorce
- Spend money recklessly
- May file for bankruptcy
- Have an addiction: drugs, gambling, shopping, etc.
If you’re worried about a beneficiary mismanaging his or her inheritance, you may give a monthly allowance instead of a lump sum. This way, your beneficiary can get the money they need without misusing the entire inheritance. The spendthrift provision prevents your beneficiaries from using the trust funds to pay creditors off.
We Can Help!
An experienced estate planning attorney can help you choose the appropriate spendthrift clause that best suits your needs and prepare the legal documents necessary to establish the trust.
At Polaris Law Group, P.C., we work to protect your assets from all possible dangers, including long-term care expenses, reckless beneficiaries, creditors, and legal disputes. Knowing that you have a plan in place to care for your finances and family can give you the peace of mind you deserve going forward.