Passing an inheritance to your children often raises the question of how the beneficiaries would use it after they receive it. Most often, you already know the answer—it probably would not last very long. You strongly suspect they would not value it like they should and would spend it as if money grew on trees. If so, you may want to include a spendthrift trust in your estate planning.
Two Main Benefits
The potential beneficiary—or one of them—is irresponsible with money and assets. Or, they may be likely to use it for gambling, alcohol, or drugs. At the same time, you want them to have some assets that could bless them once they learn their value. A spendthrift trust puts the assets in the hands of a trustee who will make the property available according to the terms of the trust’s Grantor.Another powerful benefit of a spendthrift trust is that the property under it is not under the beneficiary’s control. The Legal Information Institute says it means that a creditor cannot gain access to the assets in the trust.
How the Spendthrift Trust Works
The selected assets of the Grantor are put in the trust. The Grantor determines the terms that govern it and how the assets will be distributed.Generally, the assets are under terms that can release some of the assets or cash according to a schedule. The property in the trust cannot be given away or sold by the beneficiary. Nolo mentions that money in the trust could purchase various services or goods for the beneficiary.
The Grantor may want to distribute the assets when the beneficiary reaches a certain age or under specific conditions, such as when they start college. The Grantor completely controls the terms when establishing the trust.
The Trustee’s Control
When creating the trust, the Grantor decides how much control the trustee will have. It must be considered carefully beforehand, and then the Grantor must ensure that the wording in the document creating the trust will do exactly as intended.The Grantor can be the trustee while alive, says TrustandWill called an inter vivos trust. If so, a successor trustee needs to be named. The responsibility may also be passed to someone else if desired, or under certain conditions (reaching a certain age or becoming unable to make decisions), or at a specific time.
The decision must include a spendthrift clause as to whether or not regular payments are to be made to the beneficiary—and how much or how often? Should they be a specific dollar amount or a percentage of the income from the trust? Are there circumstances that would change the amount to be given (inflation, good behavior, graduation, etc.), or circumstances in which a payment or all benefits are to be withheld?
It must also be decided if the beneficiary can receive extra funds if they have an emergency, want to buy a car, a house, start a business, etc. It can be a simple or complex spendthrift trust.
Setting Up a Spendthrift Trust
Like other trusts, a spendthrift trust can be set up as a revocable or irrevocable trust. A revocable trust keeps the assets under the control of the Grantor, allowing for changes at any time.An irrevocable trust usually cannot be changed. Once established, the assets cannot be added or removed from the trust. In some cases, JacksonWhiteLaw mentions that if the irrevocable trust document contains wording that allows assets to be added or removed from the trust, then it is possible. Otherwise, if taken to court and the changes approved, it will still be necessary to have all the beneficiaries agree to it.
A recent ruling by the Internal Revenue Service (IRS) no longer allows the assets placed in an irrevocable trust to receive a step-up basis—which means they are taxed as part of the estate. The reason given for this is that the assets are not yet under the beneficiary’s control.
Kiplinger further states that the wording of the irrevocable trust document is the key to enabling your beneficiaries to avoid capital gains tax when they receive the assets from the trust. If the trust is part of the estate, then only estate taxes will need to be paid—but only if the estate’s value is more than $12.92 million (2023 taxes).
The Spendthrift Provision
When the document that makes the trust is created, it must contain a spendthrift trust clause. This statement declares that the assets in the trust are not to be transferred to the beneficiary at once, but they are to receive incremental disbursements.The Downsides of a Spendthrift Trust
All trusts can be considerably expensive to create and maintain. A beneficiary may be able to challenge the provisions of the trust document in court—but it is more difficult to challenge than a will. If the document contains a No Contest Clause, this clause says Justia, if challenged, it may negate the beneficiary’s interest in the assets if the challenge is unsuccessful.The No Contest clause may be treated differently in various states. In most cases, the court will favor the trust creator’s wishes.
If you have beneficiaries that you want to leave considerable assets with but are not comfortable giving them everything at once, a spendthrift trust can meet the need. Consult an experienced estate planner to ensure the trust documents fully express your intentions and contain the clauses you want included.
The Epoch Times Copyright © 2023 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
