When a considerable sum of money is involved, a spendthrift trust is an incredibly effective means of passing along and preserving wealth to your heirs. Not only does a spendthrift trust protect money from creditors, it protects it from your heirs themselves. By its nature, a spendthrift trust prevents heirs from racing through their inheritance, hence the name: it protects an inheritance from a spendthrift heir, who might otherwise squander such newfound wealth. A spendthrift trust forces the beneficiary to live within the means of the trust instead of trying to keep up with the Kardashians.
Trusts produce annual income from the investment of the corpus, or body, of the trust. The money used to start the trust is called the principal. The money earned from investing the principal is the income. For instance, a trust that is started with $2 million could be expected to produce income somewhere in the neighborhood of $120,000 per year, depending upon the return on investment of the principal. Ideally, the beneficiary of a trust lives on the income, but most trusts allow the beneficiary to draw on the principal, as well. There is no better way to fritter away a trust than by drawing down the principal. As the principal declines, so does the income, spurring further draws upon the principal. It is a death spiral for a trust. So what is the solution?
A spendthrift trust stops that death spiral before it even starts. A spendthrift trust is overseen by a trustee that controls the assets and oversees the assets, investing those assets to maximize income. The beneficiary is not allowed to spend the principal—the beneficiary receives distributions from the income of the trust. The trustee is authorized to determine how large those distributions should be, based on the trust agreement.
Not only can the beneficiary not touch the principal, he cannot pledge it as collateral. All the beneficiary can spend is distributions. The principal continues generating income, undisturbed.
Why Should I Set Up a Spendthrift Trust?
The most obvious benefit of a spendthrift trust is it prevents an heir from spending himself into penury. While a couple million dollars is a lot of money, it won’t last long in the hands of someone who spends irresponsibly because they believe it is all the money in the world. A house here, a boat there, a bad investment somewhere else—even large sums of money can disappear fast. Particularly for heirs who are not used to handling large sums of money, a spendthrift trust makes sense. Among the advantages are:
- A spendthrift trust provides a lifetime income to an heir who lacks the experience or knowledge to manage large sums of money or property. Sometimes, not dropping a large amount of money in an heir’s lap simply because you died, without any preparation for the heir on how to handle that money, is a better idea than a lump sum inheritance.
- A spendthrift trust will protect the assets of a beneficiary who winds up facing claims against them from alimony, medical bills, other unpaid debts, or judgments from lawsuits. The structure of a spendthrift trust shields the principal of the trust from such claims.
- The beneficiary of a spendthrift trust cannot sell, assign, transfer or otherwise pledge or give away the principal of the trust. If you set up a spendthrift trust for an heir, you have assurances that the beneficiary will receive the income from that trust for years to come without interruption.
- Finally, a trust avoids the probate process, which is a matter of public record. This accords a level of privacy to an inheritance that is not available when money or assets pass by way of a will.
For Help with Estate Planning, Contact the Law Offices of Kenneth P. Carp
Whether you want to establish a spendthrift trust for your heirs, or need assistance with some other aspect of estate planning, the Law Offices of Kenneth P. Carp can help. In the St. Louis and St. Charles areas, you can call (636) 947-3600 or contact us online.