Spendthrift Trusts


Not all of us are good with money. Some of us are just poor managers of it while others just spend it on gambling, other addictions, or whatever the case may be. If this describes someone whom you love and might want to help out financially through a trust, you may not want to risk them spending it all in one night. Fortunately, there are ways to help these loved ones through your estate plan.

At JCloud Law, P.C., our spendthrift trust lawyer helps clients create comprehensive estate plans that meet their needs and expectations. A spendthrift trust is one such tool you can add to your estate plan if it makes sense to do so. Contact us today at 480-378-3543 / 858-299-0440 to schedule a free 15-minute consultation and to see if a spendthrift trust would complement your estate plan and help those you love but who need help managing their money.

Understanding Spendthrift Trusts

A trust is a fiduciary relationship in which a party, known as the trustor, gives another party, known as the trustee, control over a group of assets. The trustee is responsible for managing and distributing those assets for the beneficiary, or beneficiaries, pursuant to the terms of the trust. 

A spendthrift trust is a type of trust where the beneficiary's access, as well as the access of any creditors of the beneficiary, to the assets is limited. Spendthrift trusts typically include a variation of the following clauses:

The interest of any Beneficiary of this Trust in the income and principal shall not be subject to claims of his or her creditors, or others, or be liable to attachment, execution, or other process or law and no Beneficiary shall have the right to encumber, hypothecate, or alienate his or her interest in any of the trust in any manner except as provided herein. Nor may a creditor compel a trustee to make a discretionary transfer to a beneficiary. Where the trustee is also a beneficiary, restraint on transfer is invalid against transferees or creditors of the Trustor. In no case shall a disclaimer by a beneficiary be considered a transfer to that Beneficiary.

There are many other ways in which a spendthrift clause may be worded, but it is important that this language makes it clear the trust is a spendthrift trust. Without a properly worded trust, creditors could try to get the funds or beneficiaries may try to take out more than allowed. 

A properly worded clause will clarify that the beneficiary does not have any say in how the trust funds are handled and distributed––any distribution of funds must be carried out strictly in accordance with the instructions provided by the trust.

Two important points about spendthrift trusts exist, and they are:

  1. Beneficiaries cannot give away or take loans out against the trust funds or assets; and
  2. Creditors cannot access trust funds or assets.

These two points are the reason why so many opt for spendthrift trusts because other trusts do not provide the same combination of benefits and controls.

Who Creates Spendthrift Trusts?

You may have assets that you want loved ones to inherit, but the beneficiaries of these assets may not be the best managers of finances. Spendthrift trusts, in such situations, are created by people who want to protect their estate from poor or negligent spending habits while providing financial security to beneficiaries.

Who Are Good Beneficiaries of Spendthrift Trusts?

Though anyone can benefit as a beneficiary of a spendthrift trust, it is best suited for someone who:

  • Cannot manage money well
  • Cannot be trusted with a large sum of money
  • Spends way more money than they should
  • Has a disability as an adult that interferes with their ability to manage finances on their own
  • Has a mental illness that interferes with their ability to manage finances on their own and/or induces bad judgment, especially in terms of money
  • Has an addiction, like gambling, drugs, and/or alcohol

The beneficiary of a spendthrift trust is someone whom you want to help financially but who cannot responsibly manage finances, so you need to protect their inheritance for them.

How Does a Spendthrift Trust Work?

Instead of a beneficiary receiving full access to their funds all at once, under the terms of a spendthrift trust, they receive them in increments over a specified period. The pay structure can be set up in a number of ways. 

Speaking to our estate planning attorney is the best way to determine the best pay structure to satisfy all your concerns while meeting the intended goals of the trust.

Choosing a Trustee of a Spendthrift Trust

The trustee is in charge of the trust funds and disburses the funds according to the terms of the trust. This person typically has complete control over the trust funds and assets over the life of the trust. This means you want to make sure you can count on the trustee to do what is fair, what is expected, and what is in accordance with the terms of the trust.

Pros of a Spendthrift Trust 

Many advantages of a spendthrift trust exist, and most of those benefits have already been addressed. Here is a summary of the benefits to keep in mind when deciding what you want to do:

  • When a beneficiary exhibits negligent spending habits, the spendthrift trust can prevent them from squandering their entire inheritance at once. 
  • A spendthrift trust can protect the beneficiary's inheritance from creditors. 
  • A spendthrift trust may bypass the need to go through probate.

The terms of each spendthrift trust may be customized, as allowed by state law, to meet the needs of a particular situation.

Cons of a Spendthrift Trust

There are some disadvantages to using spendthrift trusts in some states. Below are some of the disadvantages to keep in mind as you determine how you want to set up your estate plan:

  • Some debts, like alimony or child support, may not be exempt from a spendthrift trust.
  • A spendthrift trust may be irrevocable, meaning that the trustor is not able to make changes whenever they wish. 

It is important to speak with an attorney in your state regarding the laws and provisions that regulate spendthrift trusts in your jurisdiction. 

Contact an Estate Planning Attorney in Arizona & California Today

Spendthrift trusts can be more complex than other simpler types of trusts. There is a lot of money involved and a lot of potentials for it to get wasted if the beneficiary cannot be trusted to handle that money on their own. Making sure you create a spendthrift trust that is structured properly will be critical. A tailored spendthrift trust that fits your unique situation is also important. The language must be specific and the terms must comply with relevant laws. 

At JCloud Law, P.C., our estate planning lawyer will help you create a spendthrift trust that satisfies the law and your needs. Contact us today by filling out the online form or calling us at 480-378-3543 / 858-299-0440 to schedule a free 15-minute consultation.

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