What is a spendthrift trust?

On Behalf of | Oct 6, 2023 | Estate Planning

When you are in the process of creating your will and naming your child as a beneficiary, you may have concerns about their poor spending habits. Setting up a spendthrift trust ensures that your child will have financial security for years to come. 

According to the U.S. News & Money Report, a spendthrift trust “allows you to leave funds to a beneficiary without giving full control over those funds. Instead, an independent trustee is given the authority to distribute funds for the benefit of a beneficiary. 

In other words, your chosen trustee will make incremental payments to your beneficiary by following a schedule that you designed when you set up the trust. Your beneficiary may ask for additional funds, but they will not receive them. Your trustee will not deviate from your original payment schedule.

Why should you create a spendthrift trust?

A spendthrift trust fund guarantees that your child will not be able to spend the money that you leave them all at once. For example; if your child has an addiction to drugs, gambling or any other expensive vices, they will not be able to bankroll them by using their trust. 

This is where your appointed trustee comes in and keeps things on track. The trustee will not deviate from your payment plan. Thus, your beneficiary will not receive any unscheduled payments.

Spendthrift trusts also come with built-in protection. Creditors are unable to garnish money from the trust if you have designated it as irrevocable. Should your beneficiary ever file Chapter 7 bankruptcy, the court cannot touch their spendthrift trust. This means that they will not lose the funds that you intended for them when you set up the trust. 

Estate planning can be nuanced. Be sure to have legal guidance on your side as you embark on this process.