Spendthrift Trusts Pros and Cons
Before we can look at the Spendthrift trust pros and cons, we need to understand what a Spendthrift trust is, how it generally works, and what its intended purpose is.
What is a Spendthrift Trust
A Spendthrift trust is a trust which attempts to preserve the initial assets, by not allowing the beneficiary to access them. Instead, the initial assets are placed into the hands of a trustee who pays the beneficiary only the interest, or the income generated by the assets.
There are a variety of reasons why people might want to set up a Spendthrift trust, but it seems as if the initial purpose of a trust such as this was to prevent the assets from being lost due to reckless spending and claims from creditors.
Spendthrift Trusts Pros
There are many Spendthrift trust pros. Some of them might apply to you while some of them may not, but it is always important to know what all your options are when setting up a trust so that you can decide if it is truly best for you.
Ensure your Beneficiary's Future
As mentioned above, the beneficiary of the Spendthrift trust will not have access to all the assets at once, but will instead be given a sum of money over a period of time. Depending on the assets within the Spendthrift trust, this time period could be indefinite.
This means that you can rest easy, knowing that the beneficiary of the trust will be taken care of for quite some time. They will not be able to wastefully spend all of their inheritance in a single instance, and will not be able to get to the assets within the trust unless it has been otherwise stipulated.
This makes a Spendthrift trust ideal if you know that the beneficiary has some sort of mental disability, or that they have proven to be irresponsible with their finances in the past.
Can be Revocable or Irrevocable
A Spendthrift trust can be set up as either revocable or irrevocable. If you choose to set the living trust up as revocable, then you will be able to make alterations to the trust until the day that you die, in which case it will then become irrevocable unless you have specified that the power should fall to someone else.
This provides incredible flexibility, making the Spendthrift trust ideal for those with uncertain circumstances. Some who might benefit from this include parents who are setting the Spendthrift trust up when their children are quite young, and do not have any reason to assume that they would pass away for many years to come.
The many years that may pass between setting up the trust and it truly coming into effect can lead to much uncertainty which can be resolved by making the trust revocable.
The Trustee can Make Critical Decisions
In most other trusts, it is very clear what happens to the money and the trustee cannot make any further decisions. They pay what you stipulated they must, when they must. But, in a Spendthrift trust, one of the big pros is that the trustee can make certain decisions even after your death.
Some of these include withholding money, or paying additional amounts. Of course, there are limitations to this.
Examples where this may be needed include when the beneficiary runs into trouble with the law or proves that they are not able to use the money provided responsibly.
Creditors Cannot Claim the Assets
Creditors cannot claim the assets in the Spendthrift account. No matter how much debt the beneficiary may get into in the future, the assets will never be repossessed and will continue to generate income for the beneficiary.
The same applies to lawsuits. The value of the Spendthrift trust cannot be taken into account in a divorce, and cannot be seen as collateral when a business fails.
Spendthrift Trusts Cons
While there are many beneficial elements of a Spendthrift trust, it is also important to address the drawbacks or the cons so that you can decide if the Spendthrift trust is really an option worth looking at.
It Cannot be Used as Collateral
This can be seen as both a pro and a con. This aspect of a Spendthrift trust would be seen as a con from the perspective of the beneficiary because it would prevent them from getting large loans such as business loans or mortgages that they might have been able to if they had simply inherited the assets.
Difficult and Expensive to Set Up
Unlike in regular inheritance situations, the use of a Spendthrift trust requires a lot of forward planning. It is more difficult to set up than simply allowing the beneficiary to inherit your assets after you pass away, and requires the use of an attorney to ensure that it is set up correctly.
This often means that there are additional expenses. Choosing the correct trustee can also be difficult as they have more control over the assets than in a regular trust.
Irrevocable Once You Pass Away
There are many changes that may need to be made in future, but once you pass away the terms of the trust cannot be altered. Not even if the trustee knows that the beneficiary is in dire circumstances.
If the beneficiary will only benefit from the trust for a few years then this is not as big of a problem. But if, for example, your beneficiary is a teenager who will benefit from this trust for more than ten or twenty years, then it becomes incredibly difficult to ensure that all aspects and possibilities are covered.
Conclusion
There are many reasons to set up a Spendthrift trust, especially if your beneficiary is young, mentally disabled, or struggles with managing their money. But, as with all other trusts, there are both pros and cons. It is important to speak to a financial advisor when you are considering setting up a trust to ensure that it is really the best option for you and your beneficiary.
You might be also curious about What are the Advantages and Disadvantages of a Generation Skipping Trust? and What is Trust Decanting?
