Spendthrift Trusts Explained

Spendthrift trusts are specially designed to protect people who lack a certain degree of control over their spending habits. These are the people who creditors frequently call and harass because of debts, or people who have large amounts of credit card and loan debt that might come back to haunt them in the future.

Information provided as a reference only, contact a NY Estate Attorney for additional information and details.

It's a way for a trustee to ensure that their estate will be be seized by a debt collector or litigation process designed to collect a debt from the beneficiary. Furthermore, it's an effective way or monitoring a beneficiary's spending by limiting it and setting specific guidelines regarding how the trust can be spent -- and how much of it is available to the beneficiary.

Independent Oversight

The creator of a trust will generally have to indicate, in very specific language, that the trust they are establishing is a spendthrift trust designed to meter the spending of someone who is -- well, a spendthrift. When this has been established between the creator of the trust and their attorney, the trust will be written in a special way that identifies an individual who will oversee the beneficiary's spending.

The creator of the trust can include certain provisions the trust document that specifies exactly how much money can be spent, what it can be spent on, and any other restrictions involving the beneficiary's access to the estate's funds and overall value.

These provisions are then overseen and enforced by an independent trustee who is specifically identified by the trust's creator. This person is typically considered the most responsible spender in the family or the circle of loved ones and they will be essentially making all spending decisions for the beneficiary in question.

Benefits of Spendthrift Trust

Even if a spendthrift trust is not being made exclusively to protect someone from their own spending habits, many trusts contain a spendthrift provision in order to protect the beneficiary. That's because, with a spendthrift provision in a trust -- even a traditional revocable trust -- the trust funds and any interest paid can be seized by a creditor or the court in the event of a lawsuit or other litigation.

With the spendthrift provision, the trust effectively becomes inaccessible to the courts and any creditors who would otherwise seek to seize it and pay off debts held by the trustee. This added protection makes a spendthrift clause common even among those who are known for excellent money management, as most trust creators want to protect their loved ones in the event of an unforeseen complication.

Final Thoughts

Spendthrift trusts are a useful protection for those who spend in ways they should not, but they're also a great way to protect loved ones from unforeseen financial or litigious complications. This article, however, is not legal advice and those who are considering such a trust should consult with an attorney when considering it as an option in their estate planning process.