When setting up an estate plan, one of the most important tools to consider is a trust. There are a wide variety of trusts you can use for a range of purposes. One of the largest benefits is that trust assets don’t have to go through probate, and good planners may be able to avoid probate altogether or at least reduce the burden on loved ones. Each type of trust, however, has its own characteristics, benefits and requirements.
One trust estate planning attorneys often get asked about is the spendthrift trust. When you have worked long and hard to build up a substantial estate, you want your heirs to receive as much benefit from it as possible. If you feel strongly that one or more of your heirs are likely to squander the estate, you can set up a spendthrift trust to protect them from themselves.
Basically, a spendthrift trust restricts the right of the beneficiaries to draw against the trust’s principle. Properly drafted, it will not allow beneficiaries to sell or pledge away the trust assets. You can also require the trustee to approve disbursements from the trust, based on specific criteria or in the beneficiaries’ objective best interest. The trust assets are also protected from the beneficiaries’ creditors until they are distributed to those beneficiaries.
If protection from a beneficiary’s future creditors is an important factor, consider funding the trust with IRA accounts. This is because, while your IRAs are generally shielded from creditor claims, they don’t stay that way when passed on to your heirs. Inherited IRAs are subject to creditor claims in bankruptcy — but that can change if they are included in a spendthrift trust.
If you use IRAs to fund the trust, they still remain IRAs. That means there will be minimum distributions at some point. Once the trust is created, however, the minimum distributions are based upon the age of the oldest beneficiary, rather than upon your age.
As with all trusts, there are restrictions and limitations on spendthrift trusts. For example, you can’t set one up to evade your existing creditors.
If you have assets substantial enough that you are considering a spendthrift trust for your heirs, you need an estate planning attorney. Don’t risk your assets on a do-it-yourself or online estate plan. These can backfire or be invalidated if you fail to take certain details into account. We recommend discussing your goals with an estate planning lawyer who can recommend the right type of trust for you.