What is a Spendthrift Trust?

What is a Spendthrift Trust?

By:  Brittany E. O’Brien & Heather Rooney McBride

 

A spendthrift trust is a trust that is created for the benefit of a person who has no ability to make decisions as to how the trust funds may be spent or distributed.  Instead, an independent trustee (individual or corporate) makes those decisions for the beneficiary.

 

Why would someone want to establish a spendthrift trust?  Generally, if a trust contains proper spendthrift restraints on voluntary transfers, the beneficiary’s creditors cannot reach the beneficiary’s interest in the trust, or distributions made to the beneficiary from the trust.  This means that creditors cannot force a trustee to make distributions to them instead of to the beneficiary.  Further complicating things for creditors, the trustee can purchase assets in the name of the trust and allow the beneficiary to use those assets; the creditor would have no ability to attach the assets or force their sale.  Where a spendthrift trust has been created, a creditor’s only remedy is to deal directly with the beneficiary and his or her personal assets.

 

For this reason, spendthrift trusts are typically created for a person who needs financial protection, either because he may not manage money well, has a history of problems with creditors, or is easily deceived or more prone to being defrauded.  It enables the person to benefit from the assets in the trust, but ensures that he cannot “lose it all” with one bad decision; however, it also means that the beneficiary is limited to distributions that are made by the trustee.

 

With any trust, the more control the beneficiary has over the distributions, the less protected are the assets in the trust.  For example, if the beneficiary could request money whenever she wanted in whatever denomination she chose, it is highly unlikely any court would find that the trust was a spendthrift trust, which would then open up the assets held in trust to creditors.  Less extreme is when a trust provides set distribution dates and amounts; in that case, a creditor could time a garnishment to coincide with when the beneficiary is scheduled to receive a payment.  If, however, there is no set distribution schedule, a trustee can choose to distribute money in an amount and at a time the trustee feels it is best for the beneficiary, including electing not to distribute funds so that a creditor cannot try and obtain them.

 

Missouri is one of the few states that allows for a person to establish his or her own spendthrift trust.  However, there are requirements that must be followed: 1) the trust cannot be funded by a fraudulent transfer, 2) the grantor cannot have the ability to amend or revoke the trust; 3) there must be at least one other present or contingent beneficiary to the trust besides the grantor; 4) the grantor’s interest in the trust must be entirely discretionary; and 5) the trust must contain a spendthrift provision. Meeting all of the rules necessary to have a valid spendthrift trust is something that requires experience and familiarity with Missouri’s Uniform Trust Code.  This is a specialized area of the law, so it should not be done without the consultation of an experienced attorney.

 

If you would like to discuss a spendthrift trust or other estate planning strategies, contact ROONEY MCBRIDE & SMITH, LLC for your free consultation with an attorney.