Newsday’s recent article, “What to consider when creating a 'spendthrift' trust,” explains that a spendthrift trust protects people from themselves. It can be a great protection for those with an issue with drugs, alcohol, gambling or even a person who’s married to a wild spender.
A spendthrift trust—also called an “asset protection trust”—gives an independent trustee the power to make decisions as on how to spend the funds in the trust.
The beneficiary might get trust benefits as regular payments or need to ask permission from the trustee to access funds at certain times.
A spendthrift trust is a kind of property control trust that restricts the beneficiary’s access to trust principal (the money) and maybe even the interest.
This restriction protects trust property from a beneficiary who might waste the money, and also the beneficiary’s creditors.
Remember these other items about asset protection trusts:
- Be sure that you understand the tax ramifications of a spendthrift trust.
- If the trust is the beneficiary of retirement accounts, the trust must be designed to have the RMDs (required minimum distributions), at a minimum, flow through the trust down to the beneficiary.
- If the trust accumulates the income, it could be taxable. In that case, the trust would have to pay the tax at a trust tax rate. That’s substantially higher than an individual rate.
It's critical that you choose your trustee carefully. You may even think about going with a professional corporate trustee.
If the wrong trustee is selected, he or she could keep the money from the beneficiary, even when the beneficiary legitimately needs it.
Reference: Newsday (June 23, 2019) “What to consider when creating a 'spendthrift' trust”