Creating an estate plan is the responsible way to protect your assets and provide for your loved ones. Unfortunately, beneficiaries may not use the property wisely if they are irresponsible or lack financial sophistication. If you have concerns that a beneficiary may spend through an inheritance, a spendthrift trust may be the right option for you.
Your Legacy Legal Care designs innovative strategies for clients to hold, preserve, and transfer their wealth. Well-versed in the applicable trust and estate laws in Texas, we routinely draw up spendthrift trusts as part of a comprehensive estate planning strategy. When you consult us, you will have peace of mind knowing that your loved ones will be protected when you are no longer around.
What is a spendthrift trust?
A spendthrift trust is one that contains a provision limiting or controlling the beneficiary’s access to the trust assets. The purpose is to protect the principal of a trust from a beneficiary who may squander it or from claims by the beneficiary’s creditors. A spendthrift trust is particularly helpful when the beneficiary:
- Can’t handle money
- Is frequently delinquent with debt
- Has a drug, alcohol or gambling problem
- Might easily be manipulated
Instead of providing assets or funds directly to the beneficiary, the person making the trust (the settlor) designates a trustee to manage the trust property and provide regular payments, or purchase goods and services, for the beneficiary. To be valid under Texas law, the trust document must contain language which prohibits the voluntary or involuntary transfer of trust principal before payment or delivery to the beneficiary, as well as a declaration that the interest of the beneficiary is subject to a spendthrift trust.
The Role of the Trustee
In a spendthrift trust, the person named as trustee is responsible for managing the trust as well as protecting the assets from being squandered by the beneficiary. To do so, the trustee should be authorized to make set payments to the beneficiary on a regular basis. Similarly, the trustee must also have the ability to withhold payments under certain conditions, such as when the beneficiary gambles or accumulates debt.
In addition, a spendthrift trust can specify the conditions for releasing payments to the beneficiary. As an example, the trustee could be instructed to make payments directly to a landlord or a creditor rather than the beneficiary. In some cases, the beneficiary could also be required to undergo drug or alcohol testing before receiving a payment from the trustee. However, this would also require the trustee to monitor the beneficiary’s behavior, which could become a burden for the trustee.
In sum, a properly structured spendthrift trust restricts the beneficiary’s access to the trust property. Because the beneficiary cannot access the trust principal or promise it to anyone else, the trust funds are protected from creditors’ claims. Once a payment is made to the beneficiary, however, that money is available to creditors.
Ultimately, a well-designed spendthrift trust must consider the unique relationship of all the parties. It is crucial to name a trustee who is honest and capable, and who will meet his or her fiduciary duty to preserve the trust assets and provide for the beneficiary. In this regard, the trustee can be another family member, a family friend, or even a corporate trustee like a bank.
Why Choose Your Legacy Legal Care?
If you are considering establishing a spendthrift trust, working with the right estate planning attorney is essential. Trusts are complicated instruments that must follow Texas law, and the potential burden placed on a trustee for monitoring a beneficiary’s conduct is considerable. When you become our client, we will take the time to understand your circumstances and concerns and tailor a spendthrift trust to suit your needs. Knowing that the trustee will play a key role in administering the trust, we will make sure his or her powers are clearly defined and that the beneficiary’s rights are protected. Don’t let a lifetime of hard work be squandered by an irresponsible beneficiary. Above all, we are committed to helping you preserve your wealth. Contact our Your Legacy Legal Care today to set up a consultation.