When one sets out to create a sound estate plan and protect assets for beneficiaries, careful planning is critical. It is important to consider the recipient of a particular asset and the difficulties he or she may face that could pose a threat to the asset itself. This is especially true for those who wish to leave assets to a beneficiary who already carries a great deal of debt or deals with creditors using collection tactics.
A commonly used solution to this dilemma is a spendthrift trust, which places significant restrictions on how the beneficiary may interact with the assets and the trust itself. Under a spendthrift trust, a beneficiary does not have the authority to sell interest in the trust and may not pledge away interest.
In practical terms, this means that the beneficiary has protection from creditors who may pressure him or her to give up the contents of the trust to make good on a debt. In this way, the beneficiary may still receive the benefits of the trust without granting creditors access to the underlying assets.
This protection only persists until the time comes to distribute the assets to the beneficiary, at which time he or she must determine how to use them. Creditors may have more access to these assets after distribution, at which point it is the responsibility of a beneficiary to handle the matter as he or she sees fit.
Spendthrift trusts provide very specific protection that is a perfect fit for some and a poor fit for others. If you suspect that a spendthrift trust is a good fit for your needs, take care to understand the details of establishing such a trust to keep your wishes and rights protected.