This article will answer all your questions regarding spendthrift trusts, including, “What is a spendthrift trust?” and “How does a spendthrift trust work?”
Spendthrift trusts allow for the protection of property and assets. They are often used for inheritance purposes, whereby the beneficiary is paid a regular sum of money from the trust, rather than gaining complete access to the trusts assets.
At Nomad Capitalist we advise our high-net-worth individual clients on offshore trust formation and can devise a complete solution that best suits your unique needs while also guaranteeing the utmost in confidentiality, asset protection and legally-compliant tax reduction. Contact us today to learn more.
Spendthrift trusts – TL;DR
Spendthrift trusts are specifically designed for the purposes of estate planning. They help protect against irresponsible spending by holding assets safely and instead facilitating regular trust payments to beneficiaries.
If you are worried about the integrity of your entire estate after you pass, a spendthrift trust can provide peace of mind.
All trust property is managed by a trustee, this can be an attorney or firm, who then manages the spendthrift trust on your behalf.
The spendthrift trust assets are shielded from outside access by potential creditors or predatory litigators, while beneficiaries are instead paid out money on a regular basis, rather than receiving it as a lump sum.
They therefore can still continue to enjoy the benefit of their inheritance for a long time after you pass.
Spendthrift trusts – Overview
Spendthrift trusts are popular structures used in estate planning, particularly when it comes to planning for family inheritance or planning how you would like to manage marital property after you die.
Spendthrift trust definition: A spendthrift trust is a form of trust structure that puts limits or conditions on the beneficiary’s assets. Instead of granting full access to the trust assets, the beneficiary’s assets are distributed in the form of regular payments.
Spendthrift trusts are of particular interest if you have a beneficiary (or beneficiaries) with whom you do not necessarily feel comfortable granting full access to your entire estate.
Let’s face it, if you are reading this it’s fair to say you understand the importance of proper estate planning and financial planning generally, though not everyone is so good with money, to put it lightly.
You may – quite rightly – have concerns that, having worked hard to build your wealth and investments over the years, your beneficiaries may squander it or, worse, be financially reckless in other ways that allow them to lose that wealth entirely.
For example, they may just be bad with money, or they may have many creditors. (It’s a fact of life to say that some people, no matter what they do or where they go, always have lots of creditors chasing after them).
Their family situation may also give you pause. Maybe your son has a rather bitter and vindictive ex-wife who would love to get her hands on his inheritance. Or perhaps this person is well within her rights because he’s been heedless with regards to his duties including his child support obligations.
Perhaps you want to have more control over other beneficiaries, and what assets they can and cannot access, or again you may have concerns about them losing key assets to creditors, or to litigation, so you can include what are known as spendthrift provisions further limiting the assets which creditors or future creditors can have access to.
Reasons For Setting Up A Spendthrift Trust
The main reason for setting up a spendthrift trust is estate planning and to ensure that your assets remain intact and, potentially, can also still be enjoyed by future generations long after you are gone.
But what if your beneficiary has a habit of reckless spending?
In that case, it might make sense to limit your beneficiary’s access (or perhaps that of multiple beneficiaries) to your trust assets for fear they prove too profligate.
For example, if you have a beneficiary who is quite young, it’s quite possible this beneficiary doesn’t quite have the requisite financial discipline yet and would benefit better from a steady stream of income rather than a lump sum.
The second main reason for setting up a spendthrift trust is asset protection. In an environment of increased predatory litigation, there is the ever-present danger that a third party could try to gain full access to the assets you have spent so long to build up.
Once again, imagine you have a beneficiary who is financially exposed or otherwise poses a significant financial risk in future. Obviously, you don’t want your beneficiary to inherit your assets only to have them taken away again.
Using a spendthrift trust ensures that creditors cannot gain access to the assets which have been placed in the trust, and using a spendthrift provision can help add extra protection.
This is because, once created, those assets remain in trust, so the beneficiary does not gain ownership of them, but rather is paid out a regular sum of money from the trust.
How A Spendthrift Trust Works
On the one hand, a Spendthrift trust works in much the same way as other forms of trust, in that there is a settlor or grantor, the person who places the assets into the trust, the trustee who manages the trust and the beneficiary (or beneficiaries) who ultimately receive the financial benefit of the trust and its assets.
A spendthrift trust differs from most other forms of trust in one key respect, however, in that, when the settlor, also known as the grantor, dies, the beneficiary (or beneficiaries) do not gain control of the trust assets.
Rather the trust assets are put to use so that each beneficiary receives regular funds, which can be a much more palatable idea than granting your beneficiaries access to your overall estate.
So when you hear about wealthy kids having trust funds, something that is often discussed in movies, well this could be a prime example of where a spendthrift trust could be used, because who wants to hand over large sums of money and other assets to kids who have just turned 18?
But by setting up a trust with a spendthrift clause, the trust assets remain safe and you can instead distribute funds to each beneficiary or beneficiaries as and when you wish. This structure will then remain in place after you die.
How To Set Up A Spendthrift Trust
The first step when setting up any trust is to give careful consideration to exactly how you want your estate and assets to be managed. So take the time, think it through, and map it all out in your mind before you decide to make any major decisions.
You don’t want to rush things, especially if you are planning to ensure your family’s future wellbeing. So the planning time is something you should take your time with because the more you plan, the more prepared you are for all manner of eventualities in the future.
Once you are satisfied with how you wish to proceed you then need to get in contact with a professional, for example, a lawyer or a law firm who specialises in trust law, to act as trustee.
This individual or firm can also help you draft up the terms of the trust, a document commonly referred to as the trust agreement.
This is the main trust document which outlines how the trust is going to operate and names each beneficiary.
By including a spendthrift provision the trustee then ensures that assets remain secure within the trust and instead each beneficiary receives a regular income. For example, you may opt to pay each beneficiary a monthly allowance.
At Nomad Capitalist we consider setting up a domestic trust to be a half measure since they don’t offer anywhere near the same level of privacy, asset protection and tax benefits you get with an offshore trust.
Finding an independent trustee who isn’t just trying to sell you on one jurisdiction is a near-impossible task, however, and so that is is where we come in.
As a Nomad Capitalist client, we will help you to find the right offshore trust jurisdiction for your needs and then, with our global network of trusted partners, work with our people on the ground to help you execute your plan.
Spendthrift Trust Pros And Cons
Since a spendthrift trust has a spendthrift provision, it is an ideal structure to employ to help protect against irresponsible spending.
Since a spendthrift trust is essentially a separate legal entity, whereby the beneficiary only has indirect access to funds through regular payments managed by the trustee, there is no danger that a beneficiary’s creditors can gain direct access to the trust’s assets.
Therefore any person looking to gain access to the trust’s property will be unable to do so, they will only be able to lay claim to income which the beneficiary is paid out from the trust.
A spendthrift trust, therefore, is suitable in certain circumstances, but not all.
Since the beneficiaries of a spendthrift trust don’t get full access to the assets in the trust, they don’t get the full access to, or the full benefit of, the assets which are placed in the trust.
Perhaps, for example, they may wish to leverage the value of those assets for further investment purposes, or, indeed, they may have existing creditors to pay. With access to the full assets in the trust they may be able to pay those creditors off in one fell swoop, rather than having the whole thing dragged out for months or even years while they repay their creditors via multiple payments, potentially incurring higher fees.
Ultimately your choice whether or not to use a spendthrift trust comes down to the level of control you wish to retain, or cede, and whether or not you truly believe that the beneficiaries of the trust can be relied upon to manage their finances responsibly.
Spendthrift Trust Tax Benefits
It’s also worth noting that spendthrift trusts may also have additional tax benefits, both for you the settlor and for the beneficiary/beneficiaries.
This is because, by transferring assets into the trust, you can avoid or, at least, reduce your estate tax burden, while beneficiaries also have the potential to enjoy reduced taxes on their trust income.
As always, with taxes, it’s important not to speak in broad strokes about such matters so you are advised to get advice beforehand, especially since your national and, perhaps depending on where you live, state law, can vary.
If you are looking to maximise your tax benefits, while also enjoying the highest levels of privacy and asset protection, then an offshore trust is definitely the way to go.
You would be forgiven for thinking setting up such a trust is difficult but we make it easy, contact us today and we’ll show you how to get the best results while also ensuring you are fully tax compliant.
Protect Your Assets And Guarantee Your Legacy
If you would like to set up a spendthrift trust offshore for your estate and for tax purposes then get in touch and we’ll show you how.
We provide global solutions in multiple jurisdictions and can help you find the best solution to suit your specific circumstances, managed by one of our global partners as trustee.
Not only will you enjoy the highest levels of asset protection you can use it as your springboard to a whole new offshore world that includes offshore banking and investments, all fully compliant and carefully packaged together as part of your offshore Action Plan.
Spendthrift trust FAQ
A spendthrift trust is a type of trust structure that’s designed to protect against reckless spending.
The settlor, or grantor, creates the trust and adds assets to the trust. The trust also contains a spendthrift clause, so that once the settlor/grantor dies the beneficiary or beneficiaries do not gain full access to the assets but instead can enjoy regular income from the trust.
Spendthrift provisions are special conditions added to a trust to protect trust assets from beneficiaries who may otherwise squander the trust assets or where there’s a risk they might be seized by creditors or through predatory litigation.
Adding a spendthrift provision ensures that beneficiaries cannot claim the assets in full but instead, the assets in the trust work to fund regular payments to them, for example, as a regular monthly income.
Spendthrift trusts can be set up with the help of an estate planning attorney or other professional with a background in trust law. This professional, or company, can help draft the trust document and can then be appointed as the successor trustee once the settlor dies.
Self-settled trusts are special trusts available in certain jurisdictions whereby the settlor and beneficiary can be the same individual. It is possible to create a self-settled spendthrift trust whereby assets are added into the trust and then the trust pays out a regular income. It can be a useful way to protect assets since assets in the trust are the property of the trust, not the beneficiary.
An irrevocable trust is a type of trust which, once formed, cannot be changed. The assets in the trust become the responsibility of the trustee who then manages how they are disbursed to the beneficiary or beneficiaries.
Irrevocable trusts are often used for asset protection, as creditors cannot gain access to the trust assets, only to the money earned from the trust by beneficiaries.
It is the opposite of a revocable trust, which can be altered at any point up until the death of the settlor, provided the settlor is of sound mind and body. Following the death of the settlor, the trustee manages the trust in a fiduciary capacity.
