What is a Spendthrift Trust?

A Fairfax, VA Estate Planning Attorney Discusses Spendthrift Trusts

Occasionally, we have clients who tell us that they have concerns that their husbands, wives, sons, daughters, or other beneficiaries will just squander their inheritances within a few months of the testator’s death. This may be because their beneficiaries have demonstrated a history of poor spending habits, make unwise investments, or they have creditors waiting to snatch any and all assets that fall into the heirs' hands.

Establishing a Spendthrift Trust

As northern Virginia estate planning lawyers, one of the vehicles that we recommend to our clients who have these concerns is the spendthrift trust. Like other trusts created in the Commonwealth of Virginia, a spendthrift trust is an asset pool that the benefactor/settlor establishes for a beneficiary. A responsible third person—the fiduciary—manages and dispenses the funds in accordance with the requirements of the maker of the trust. The benefits of a spendthrift trust are:

• The beneficiary does not have direct control of the assets. The fiduciary can make direct payments to educational institutions, medical facilities, mortgage lenders, et cetera. Or he or she can dispense cash payments in small, regular amounts, like an allowance.
• In most cases, if the spendthrift trust is properly established, the funds in the trust are legally protected from third party creditors.

Although the spendthrift trust sounds like the perfect solution for people who have fiscally irresponsible heirs, it is by no means a bulletproof instrument.

How a Spendthrift Trust Could Fail

Fiduciary Misconduct: If you are not using a licensed Virginia trusts and estates attorney as a fiduciary to govern the trust, you will need to make certain that the person you choose will make the right decisions for your heir. Trusts are only as good as their fiduciaries. So, for instance, if your fiduciary dispenses payments in too large amounts to your beneficiary, it would defeat the purpose of the trust, and the funds could be rapidly depleted.

Exempted Creditors: In some states, certain third parties are not considered creditors and can access funds in the trust through the courts. For instance, a parent seeking child support or an ex-spouse who is owed alimony may not be considered a creditor by the courts, and may bring suit to access the funds in the trust. Furthermore, many states allow creditors who provide necessity of life goods and services—food, housing, medical care—to go after funds in the trust.

Discuss the Spendthrift Trust Option with Your Virginia Estate Planning Attorney

Whether you have a relative who has a poor history of money management; suffers from drug, alcohol, or gambling addiction; or who is drowning in debt; the spendthrift trust may be your best option. Talk to a qualified Virginia estate planning attorney about this and other trust solutions in multiple areas around Virginia (including Fairfax and Annandale). Our attorneys can also assist with other types of trusts, including resulting and constructive trusts as well as even pet trusts.