How to Protect Your Heirs With a Spendthrift Trust

Tue Apr 16, 2019 | Trusts |

For most individuals who create trusts, their primary concern is the support of their spouse, children, and any other family members who are to receive assets under the trust. However, not everyone is “good with money,” as it were, and trust settlors often worry about what their beneficiaries will do with the assets they receive. To assuage these concerns, many settlors choose to create “spendthrift trusts” to restrain their beneficiaries from making unwise financial decisions.

What is a Spendthrift Trust?

A spendthrift trust is very much like other trusts — it holds assets granted to it by a settlor for the benefit of the beneficiaries and it is administered by a trustee. What differentiates spendthrift trusts from other types of trusts is that they contain an additional provision (sometimes referred to as a “spendthrift provision” or a “restraint on alienation provision”) that prevents the trust’s assets from being assigned to creditors and gives the trustee broad discretion to determine which payments are necessary under the trust agreement. These provisions thus prevent a beneficiary from transferring his or her interest in the trust or spending any of the trust’s funds before he or she actually receives a distribution.

Advantages of Spendthrift Trusts

Spendthrift trusts offer a number of advantages over ordinary trusts, such as:

Protecting Beneficiaries from Themselves

You’ve likely heard of lottery winners who end up broke only a few years after becoming millionaires. Unfortunately, this scenario can also occur when a financially imprudent beneficiary receives a large sum of money all at once. Because the trustees of spendthrift trusts are often given broad discretionary powers under the terms of the trust, they can release funds to beneficiaries a little bit at a time to prevent them from squandering it.

Protecting the Trust’s Assets from Creditors

In the absence of a spendthrift provision, creditors can claim a beneficiary’s assets in the trust before they are distributed. With a spendthrift trust, however, a beneficiary’s share of the trust’s assets is inaccessible to creditors so long as they are still held by the trustee. For example, assume that you leave $1,000,000 to your daughter in a spendthrift trust and the trust generates $50,000 per year that the trustee pays to her. If she spends more than $50,000 — such as by purchasing a $75,000 car — her creditors will be unable to access the remaining $25,000 because it has not yet been distributed to her.

Limitations on Spendthrift Provisions

A settlor’s ability to prevent creditors from reaching a beneficiary’s interest in a trust is not unlimited. Florida law provides that spendthrift provisions are ineffective against certain types of creditors, including:

  • A beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance
  • A judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust
  • A claim against the beneficiary by the United States or the state of Florida

Contact a Boca Raton Asset Protection Attorney

Almost everyone has at least one family member who just cannot seem to stay out of financial trouble. If that is your case, you should explore establishing a spendthrift trust to protect your loved ones from themselves. For more information, contact a Boca Raton asset protection attorney at the Ellis Law Group by contacting us online or calling 561-910-7500.