How a Spendthrift Trust Can Preserve Wealth

While tax planning is an important aspect of estate planning, it’s often not the primary focus for most people. The main objective of estate planning is to protect your family’s future. Saving taxes is just one of many tools available to ensure your family’s financial security. Equally important is asset protection, and a spendthrift trust can be an effective way to preserve wealth for your heirs.

What Is a Spendthrift Trust?

A spendthrift trust is designed to protect beneficiaries by preventing them from directly accessing trust funds or transferring their rights to others. This structure also helps protect the trust’s assets from creditors or a beneficiary’s ex-spouse.

Rather than giving beneficiaries control over the funds, the trustee manages the trust and makes payments according to the terms outlined in the trust document. Payments can be made regularly or on an "as needed" basis, depending on the trust’s instructions. Once a payment is received, however, creditors may claim that money.

It’s important to note that a spendthrift trust isn’t primarily a tax-saving vehicle. Instead, it’s most useful when you want to leave assets to someone but have concerns about how they might manage the inheritance.

For instance, you may worry the beneficiary is not financially responsible, could be defrauded, has had issues with creditors, or struggles with an addiction that could lead to financial instability.

In such cases, a spendthrift trust can offer asset protection by allowing the trustee to control the release of funds, minimizing the risk of misuse or overspending. However, this brings up another critical factor: the role of the trustee.

The Role of the Trustee

The trustee plays a pivotal role in managing the trust’s assets. Depending on the trust’s terms, the trustee may be responsible for making scheduled payments or may have broad discretion over when, how much, or whether payments should be made at all.

In some cases, the trustee may be guided by the trust’s investment performance, adjusting payments based on returns. The trustee may also have the authority to withhold payments if certain conditions occur, such as if the beneficiary incurs excessive debt or declares bankruptcy.

Choosing the right trustee is crucial, especially if you grant them significant discretion. Trustees are often CPAs, attorneys, financial planners, or investment advisors—professionals with the expertise and experience to manage the trust responsibly. It’s also important to name a successor trustee in case the original trustee can no longer fulfill their duties during the trust’s term.

Additional Considerations

While a spendthrift trust offers substantial protection, it’s not foolproof. Government agencies may still access trust assets to satisfy obligations such as taxes, depending on the law.

It’s also essential to define when and how the trust should end. It could be established for a set number of years or terminate upon a specific event, such as a beneficiary reaching a certain age.

If you have questions about how a spendthrift trust might fit into your estate plan, contact us for guidance.