Trustee-Managed Wealth Plan: Definition and Operational Process
A spendthrift trust is a type of legal entity designed to manage and disburse assets while the grantor, the person who creates and funds the trust, is still alive. This trust is particularly useful for individuals who want to provide for a beneficiary, such as a minor, without giving them direct access to the funds.
The trust is structured to protect the beneficiary's assets from most creditors and lawsuits, a feature known as the spendthrift clause. Examples of spendthrift trusts include Miriam's trust for her great-nephew Kyle to provide monthly allowances and Edward's trust for his granddaughter Amanda to limit her spending.
The beneficiary, the person who receives benefits from the trust, can be a minor, financially immature, impulsive with money, in heavy debt, easily defrauded, suffering an active addiction, children with functional needs and eligible for SSI or Medicaid, involved in or at risk of getting a divorce, employed in an industry with frequent lawsuits, or simply seeking to protect assets from creditors.
The frequency and amount of payments to the beneficiary can be specified, and they can be structured as a percentage of the trust principle or income. Payments can continue for a specific number of years or for the expected lifetime of the beneficiary.
From a tax perspective, both regular trusts and spendthrift trusts are subject to trust income tax rules—trusts pay taxes on undistributed income, and beneficiaries pay taxes on income they receive. However, spendthrift trusts, especially irrevocable ones, can help reduce estate taxes by removing assets from the grantor's taxable estate once transferred to the trust.
It's important to note that if the spendthrift trust is irrevocable, it likely cannot be modified even if circumstances change. A successor trustee is needed if the initial trustee dies or becomes incapacitated. You can choose to make your trust revocable or irrevocable, offering flexibility or potential estate tax benefits, respectively.
An online estate planning platform can guide you in setting up a spendthrift trust, but working with a financial advisor or estate planning attorney may be preferable to avoid errors that could compromise or invalidate the trust.
In summary, spendthrift trusts provide a valuable tool for asset protection and financial management, with primary distinctions in estate tax exposure and creditor protection. If you are considering setting up a spendthrift trust, it's recommended to consult with a financial advisor or estate planning attorney to ensure its suitability for your specific needs.
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