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A spendthrift trust is a type of trust that regulates a beneficiary’s access to the funds or assets held within the trust account. It’s an important estate planning tool that can help guarantee your beneficiaries are taken care of, while simultaneously ensuring your assets are distributed according to your specific terms.
Spendthrift trusts can be revocable or irrevocable and include the same key elements as other types of trusts, including:
However, spendthrift trusts operate a bit differently than other trusts.
A spendthrift trust includes what’s called a spendthrift clause or spendthrift provision. This caveat permanently designates the trust itself as the sole owner of the assets held within it, rather than transferring ownership to your beneficiary upon your passing.
The beneficiary will still receive the assets, however — they’re released from the trust over time, on a schedule you (the grantor) and your trustee determine when you create the trust. This incremental release of assets can help protect your estate from any irresponsible spending habits while still providing your loved ones with the inheritance you’ve set aside for them.
The main benefit of a spendthrift trust is that it can protect your assets from a potentially unreliable beneficiary. It safeguards your estate without taking the beneficiary’s inheritance from them.
In addition to asset protection, spendthrift trusts can help protect your beneficiaries from creditors. Because the assets included in a spendthrift trust are owned by the trust and managed by the trustee, they aren’t considered a part of your beneficiary’s assets.
Let’s say you plan to leave a $100,000 estate to your beneficiary, but you want to ensure the money is handled responsibly. By using a spendthrift trust, you can still leave that money to your beneficiary while portioning it out to encourage healthy financial habits.
You and your trustee then work together to schedule releases of money at a cadence that feels manageable to you and your beneficiary. Ultimately, you determine you’d like that money to go to your beneficiary in monthly $5,000 increments.
This way, you can guarantee that money will go to your beneficiaries in more manageable chunks, as opposed to distributing the entire $100,000 at once.
Setting up a spendthrift trust is similar to setting up any type of trust, but it includes a few extra steps. The biggest difference is that you’ll have to set the terms for how you’d like to release your assets. These terms can be as complicated or as simple as you’d like.
Similar to the example above, you can specify a recurring monthly distribution of assets— or you can also include specifications for extenuating circumstances. For example, you can outline whether you’d like your beneficiary to receive extra funds in an emergency and, if so, how you’d like that to work.
Regardless of what you’d like the terms of your spendthrift trust to be, an estate planning lawyer can help you set it up. Consulting with a lawyer will help ensure your trust functions according to your wishes as well as help you navigate the relevant legal jargon and processes.
This article is intended to provide general information about insurance. It does not describe any Metropolitan Life Insurance company product or feature.
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