What is a Spendthrift Trust?

What is a Spendthrift Trust?

Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
February 12, 2020

In this article we’ll answer the questions, “what is a spendthrift trust?”, “How does a spendthrift trust work?”, “When is a spendthrift trust useful?”, and “What is the role of the trustee in a spendthrift trust?”

A spendthrift trust is one type of estate planning tool that should be considered when your looking to protect you’re money from creditors, avoid probate and make sure the beneficiaries don’t receive the transferable assets as one lump sum after death of the grantor. The spendthrift trust ultimately limits the assets available to the beneficiary and protects the rest of the assets still in the trust from creditors. The trust retains most of its assets, depending on how it is structured, for an extended period of time, making only periodic distributions to the beneficiaries. It can work well if there is concern that the beneficiary may squander the assets or if there is another need to disperse assets slowly, over a period of time.

How Does a Spendthrift Trust Work?

Depending on how the grantor decides to structure the trust, restrictions are placed on the beneficiary’s claim to the trust principal. The trust principal is the original list of assets placed into the trust. Depending on the assets in the trust, such as different investments, the trust can continue to generate income. This income would also need to be considered when structuring the trust. The upside to not having the beneficiary have direct access to the trust principal is that neither do creditors. 

A spendthrift trust is created when the grantor (the person putting whatever assets into the trust) signs a contract specifying three parts:

  • The assets
  • The beneficiaries
  • The trustee

The assets are what is being transferred, the beneficiaries are who receives the assets structured in the trust, and the trustee is who controls the trust before and after the death of the grantor. For example, the spendthrift trust could be structured so that the beneficiary receives some real estate property immediately, but then only receives the amount of money each month or year to cover basic living expenses. 

When is a Spendthrift Trust Useful?

Spendthrift trusts are most useful when the grantor wants to leave only a certain amount of his or her assets to a beneficiary and/or wants those assets dispersed over a given period of time, for fear of the heir abusing the assets or creditors claiming the assets.

Generally, there are many reasons a grantor might not be comfortable with one or more beneficiaries handling his or her trust funds after death. Some of the more common include:

  • History of poor money management
  • Large amount of avoidable debt or a strong chance of future debt
  • Easily deceived or high chance of fraud
  • Disability
  • Drug of alcohol addiction, increasing the likelihood of squandering money

Ultimately, it is up to the grantor to decide how he or she wants the assets in the trust handled and this must be structured in the trust so that the trustee can appropriately manage the trust after the grantor’s death.

What is the Role of the Trustee in a Spendthrift Trust?

A large part of the spendthrift trust is structuring what kind of control the trustee has over the trust assets. Unless specified in the trust, a trustee will not be able to change the language of the trust after the grantor’s death. This is why it is very important for the grantor to think long term when structuring a spendthrift trust. The terms of the trust should describe, in detail, the power and responsibilities of the trustee. Here are some examples of questions to consider when structuring a spendthrift trust.

  • Should the trustee make specific cash payments from the trust to the beneficiary, or should the trustee have the responsibility to determine how much money is given to the beneficiary over the period determined by the trust?
  • If not already detailed in the trust, what frequency should funds be dispersed? 
  • If there are multiple beneficiaries do they all receive an equal amount over the same period of time?
  • Should the trustee have any power over making payments to the beneficiaries, or are they simply meant to manage the investments in the trust?
  • Should the beneficiary have the power to withhold payments? If so, under what circumstances should the funds be withheld?

Clearly, the list could go on indefinitely. The relationship between the grantor and the beneficiaries and any unique circumstances associated with either party will certainly affect how the trust is structured. It’s also important for the grantor to understand the burden of responsibility they may be placing on the trustee if the agreement requires consistent oversight on the trustee’s part. The grantor can name themselves trustee, or someone else, but they should also name a replacement trustee if the primary trustee is a living person who will ultimately become deceased. In any event, if you are considering a spendthrift trust and have questions, don’t hesitate to reach out to our legal professionals at 630-324-6666 and check out our other articles at Learn About Law.

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When is a Spendthrift Trust Useful?

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