When you want to secure your estate and are concerned that your assets may be improperly managed, you might wonder, “What is the Irrevocable Spendthrift Trust?” Read more to find out.
Author: Paul Black
Paul’s experience as the son of two parents with big health challenges is what led him to the work he does today and gives him first-hand knowledge of the challenges that many caregivers and family members face. After graduation from GSU Law, Paul was chosen from dozens of applicants nationwide as one of three 2010-2011 Borchard Foundation Law & Aging Fellows. Paul has been named as a SuperLawyers “Rising Star” in the area of Estate Planning and as a member of Georgia’s “Legal Elite” by Georgia Trend magazine. Published on: March 09, 2022. Last updated on: March 18, 2022.
What Is the Irrevocable Spendthrift Trust?
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The irrevocable spendthrift trust is a type of trust intended to protect a beneficiary’s interest in the trust assets when they are known to be a spendthrift, or someone who is careless with their money. This is a powerful option to protect your assets as not everyone has the self-discipline to manage vast sums of money, particularly when received as a lump sum.
In the United States, a spendthrift clause is an irrevocable trust set up by an individual who may then designate himself as the trustee even though they cannot be the beneficiary of their trust.
Purpose of a Spendthrift Clause
The purpose of these trust agreement asset protection provisions is to ensure that creditors and other persons of interest cannot gain access to the trust created by taking advantage of the beneficiary’s spendthrift status. A benefactor may include a provision for extraordinary circumstances that require the beneficiary to withdraw from the trust’s assets, such as a medical emergency.
If you are in the market for an estate planning lawyer, Paul Black is an excellent option. For years, he has been a distinguished conservatorship, incapacity planning, special needs planning, and probate lawyer working in Atlanta, Georgia.
Irrevocable Spendthrift Trust vs. an Asset Protection Trust
A revocable trust commonly referred to as a living trust may be subject to creditor claims of the settlor, even when it has a spendthrift clause. However, a settlor can protect assets by making the living trust irrevocable upon death. Each beneficiary is protected and restrained from retained and potential creditors by including spendthrift clauses.
Under state law, the beneficiary’s share in the principal and income from the trust cannot be extracted by any of these creditors:
- A judgment creditor from the beneficiary causing injury to another through auto accident negligence, criminal conduct, or some malpractice or malfeasance
- A judgment from the bankruptcy court
- A lender for a personal debt, such as promissory notes, student loans, home improvement lines of credit, or mortgages to be paid
- Property settlement orders in dissolution action like divorce
The trust is protected from creditors even if the beneficiary refuses to meet obligations.
Asset Protection Trust
A settlor can typically find this type of irrevocable trust with himself and his descendants, spouse, and other beneficiaries. This will protect assets in the trust from the beneficiary’s creditors, his creditors, and his spouses’ creditors. It will even protect the assets of the trust from estate taxes.
Under trust law, the assets of a domestic asset protection trust cannot be attached unless:
- The creditor can provide clear and convincing evidence showing that their claim arose after or before the qualified disposition to the trust.
- The action is brought within a short time following the qualified disposition.
- The creditor can provide convincing evidence of fraudulent conveyance intended to prevent the specific creditor from bringing a claim.
If you may have legal encumbrances that may drain your domestic asset protection trust, one of the most effective ways is to establish an offshore trust. The most significant advantage of offshore trusts is that they are usually not subject to U.S. court orders.
A skilled and experienced asset protection attorney in Atlanta, Paul Black may be the lawyer you are looking for.
Spendthrift Provisions in a Trust
A spendthrift clause is a provision in a trust that protects assets from a spendthrift designated beneficiary. When such a provision is in the trust document, the beneficiary’s access to the trust funds is restricted. This is specifically designed to prevent them from squandering or dissipating the funds bequeathed to them.
Still, spendthrift clauses are typically not the most appropriate way to protect assets in a trust from creditors, as this can usually be challenged and overridden in court. For instance, a trustee may have to have support obligations to a former spouse or pay child support even on irrevocable trusts.
Moreover, even if the beneficiary or trustee does not have any legal encumbrances, they can still be prevented from accessing assets held in the trust unless they have court approval. Still, spendthrift provisions have a vital place in estate planning, as they ensure the beneficiary will not have their inheritance squandered by creditors by limiting how much money someone has access to and how they can use it.
How a Spendthrift Trust Works
Spendthrift trusts are a type of estate planning method that protects assets by restricting access to the funds by a beneficiary. The beneficiary, or any person with interest in the trust, cannot usually use the money unless expressly allowed by the terms of the trust.
Most people are also looking to ensure that all the money they leave will go to their beneficiaries. Nonetheless, they want them to have their inheritance but not squander it on frivolous things such as alcohol or drugs. Spendthrift trusts as an estate plan are usually set up when you leave an inheritance to someone known to be at high risk for squandering their inheritance.
As one of the preeminent estate planning law offices in Atlanta, the Law Office of Paul Black has been working in spendthrift trusts for years and understands the process.
How a Spendthrift Provision Can Help Protect Your Assets
A spendthrift trust provision refers to a term found in a trust, will, or other types of estate planning documents. Spendthrift trusts make it possible to retain property in the trust by preventing the voluntary or involuntary transfer of trust property.
Beneficiaries are usually unable to transfer or redistribute trust assets unless they spend the funds for specific purposes such as the benefit of the next generation or the beneficiary’s interest.
However, it is critical to note that a spendthrift provision will not stop a beneficiary from making reasonable purchases with the assets in their care. The only thing a spendthrift trust can do is prevent them from making unwise or wasteful purchases.
Requirements for an Effective Spendthrift Trust Provision
To make your spendthrift trust assets more secure from both the beneficiary and creditors, you need to do the following:
- The beneficiary needs to be restricted from accessing or controlling any assets in the trust
- The trustee should be restricted from having access to distributed property
- The trust needs to be made irrevocable
If you are looking to transfer property to your descendants or spouse, one of the most effective ways to do this is through a spendthrift trust. When looking to set this up, it is best to work with a supportive and knowledgeable trust lawyer.
By working with attorneys such as Paul Black, you will gain the advantage of working with someone who has a great deal of experience and skill in estate planning. The Law Office of Paul Black has been working in estate planning for years and is experienced in anything from revocable to irrevocable and offshore trusts. Contact us today.