Most families want their legacy to be a source of financial stability. Yet when assets are inherited outright, even well-intended gifts can be exposed to divorce, lawsuits, creditors, or impulsive financial decisions.
Spendthrift trusts provide an added layer of protection, helping ensure inherited assets are accessed and used as you intend.
This guide explores how spendthrift trusts can help shield wealth from life’s uncertainties while providing peace of mind.
The Basics of Spendthrift Trusts
A spendthrift trust is a tool to help protect an inheritance from being used (or taken) too quickly. It limits a beneficiary’s ability to give away or borrow against their trust interest and generally keeps creditors from reaching trust assets before they’re distributed.
Instead of handing over a lump sum all at once, the trustee distributes funds gradually over time following guidelines you set -- such as reaching a specific age, graduating from college, or demonstrating financial responsibility.
Most importantly, spendthrift trusts help ensure your loved ones can benefit from what you’ve built without it becoming a source of stress, risk or regret.
Ideal Situations for a Spendthrift Trust
What sets this type of trust apart is the spendthrift provision: a clause that keeps assets owned by the trust itself, rather than by the beneficiary. This distinction helps protect an inheritance from outside claims and reckless spending decisions.
A spendthrift trust may be a good fit if your heirs are:
- Minor children or grandchildren
- Prone to impulsive spending or credit use
- In or potentially facing a divorce
- Struggling with, or recovering from, addiction
- Working in high-liability professions, such as medicine or law
Note: Spendthrift provisions can be included in many types of trusts, including revocable living trusts, special needs trusts, or testamentary trusts.
Key Benefits of Spendthrift Trusts
At its core, a spendthrift trust protects your legacy while still supporting the people you care about. It’s especially effective when a beneficiary may need guidance or guardrails to ensure long-term financial stability.
Key benefits include:
- Asset protection. Assets held in a properly structured irrevocable spendthrift trust are generally shielded from creditors, lawsuits, and divorce settlements.
- Built-in oversight. For younger or financially inexperienced heirs, the trust can provide steady financial support without the risks of a lump-sum inheritance.
- Privacy. Trust assets typically avoid a long and expensive probate, keeping family financial matters out of the public record.
- Flexibility and control. You can tailor distributions to each heir’s age, maturity, and financial situation, rather than taking a one-size-fits-all approach.
- Wealth preservation. Assets held in an irrevocable spendthrift trust may be excluded from your taxable estate, helping reduce the estate tax burden on your heirs.
Example: How a Spendthrift Trust Works
John and Olivia’s family includes adult children at different stages of life and young grandchildren who will one day rely on an inheritance. Rather than distributing assets outright, John and Olivia establish an irrevocable spendthrift trust.
They appoint a professional trustee to manage the trust and provide their children with regular income for living expenses, healthcare, and more according to a schedule they set in the trust document.
As grandchildren come of age, the trustee can make distributions for education, home purchases, or business ventures (as per John and Olivia’s wishes) while remaining trust assets are preserved for future generations.
Spendthrift Trusts: A Brief Q&A
Q: Is a spendthrift trust only for “problem” beneficiaries?
A: Not at all. Many families use spendthrift trusts proactively for responsible beneficiaries to protect against unforeseen risks like lawsuits, divorce, or economic downturns.
Q: Can a beneficiary access trust assets whenever they want?
A: No. Distributions are made according to the trust’s terms and the trustee’s discretion. This structure provides asset protection.
Q: Who should serve as trustee?
A: Given the financial stakes involved, consider appointing an experienced corporate trustee, such as National Advisors Trust, to take on the many complex fiduciary and administrative duties.
Q: Do spendthrift trusts protect against all creditors?
A: They generally protect against most creditors, but certain claims -- such as child support or alimony -- may be treated differently under state law. That’s why it’s important to work with an experienced advisory team that includes an estate attorney.
Q: Are spendthrift trusts expensive to maintain?
A: Costs vary based on trust size, complexity, and trustee choice. For many families, the protection and peace of mind far outweigh the administrative costs.
Protect What You’ve Built
Incorporating a spendthrift trust into your estate plan reflects an understanding that life is unpredictable, and even well-intentioned beneficiaries may face challenges beyond their control.
Speak with your estate planning team today about how to set up a spendthrift trust that aligns with your family’s unique needs and goals. If you don’t have an advisor, connect with one in our growing national network of 6,000+ professionals.
