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May 6, 2021

Why You Should Consider a Spendthrift Trust


spendthrift trust

Fewer estates are now subject to the federal tax, as the federal gift and estate tax exemption has reached an inflation-adjusted $11.7 million for 2021.

President Biden has proposed reducing the exemption to $3.5 million, but it’s unclear whether or not the proposal will pass Congress. In the event that no bill is passed, the exemption is scheduled to revert to an inflation-adjusted $5 million on January 1, 2026.

In any case, estate planning will still be important for most families, because tax planning is only one component of estate planning—and in many cases, it isn’t even the most important.

Estate planning exists to protect your family, and saving taxes is only one of the ways you can provide for your family’s financial security. Asset protection through a spendthrift trust is another invaluable tool you can use to preserve wealth for your heirs.

Not just for spendthrifts

Despite their name, spendthrift trusts aren’t only useful for protecting profligate heirs from themselves. Even financially responsible heirs may have to face frivolous lawsuits, unscrupulous creditors, or dishonest business partners—and a properly designed spendthrift trust can protect your family’s assets under these circumstances.

A spendthrift trust can also protect loved ones during changes in a relationship. In the event that one of your children divorces, spendthrift trust property is generally protected from your child’s spouse in the divorce settlement.

If your child predeceases their spouse, a spendthrift trust can also prevent your child’s inheritance from going to the spouse rather than your grandchildren. Generally speaking, your child’s spouse is entitled by law to a large portion of your child’s estate, which may be a desirable outcome in some cases—but may also be undesirable if your child already has children from a prior marriage.

Protecting your wealth

A spendthrift clause restricts a beneficiary’s ability to assign or transfer their interest in the trust, as well as the rights of creditors to reach trust assets. A variety of trusts can be made into spendthrift trusts by including a spendthrift clause.

It’s worth noting that spendthrift trusts don’t offer absolute protection. Government agencies may be able to reach the trust assets depending on applicable law—to satisfy a tax obligation, for example.

Generally, giving the trustee more discretion over distributions from the trust will offer greater protection against the claims of creditors. Trusts that require the trustee to make distributions for a beneficiary’s support may be less protected, since a court may rule that creditors can reach trust assets in order to satisfy support-related debts. As such, giving the trustee full discretion over whether and when to make distributions is generally preferable.

We’re happy to help you determine if a spendthrift trust is right for your estate plan. If you have further questions, contact us today.

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