Tax planning is just one aspect of estate planning, and often not the most significant for many families. The primary aim of estate planning is to protect and provide for your family’s financial security with tax savings being a part of the overall strategy. Asset protection is another critical component and a spendthrift trust can be a powerful tool to safeguard wealth for future generations.
What is a spendthrift trust?
A spendthrift trust restricts a beneficiary from directly accessing or transferring their interest in trust funds, which also limits access by creditors or an ex-spouse.
Instead, the trustee controls the distribution of funds to the beneficiary according to the trust’s terms, whether through regular payouts or on an as-needed basis. The specific timing and amounts of these distributions are spelled out in the trust document. Once funds are distributed, however, they may become accessible to creditors.
It’s worth noting that spendthrift trusts are not primarily designed to reduce taxes. Instead they are most beneficial if you want to leave assets to a family member who might lack financial discipline, be vulnerable to scams, or struggle with other issues like addiction that might lead to a rapid depletion of funds.
In these cases, a spendthrift trust offers asset protection by enabling the designated trustee to oversee and control distributions to prevent misuse or overspending.
The vital role of the trustee
The trustee’s responsibilities vary based on the provisions of the trust. Some trustees are required to make scheduled payments, while others have broad discretion to decide when and how much to distribute. In some cases, like if the beneficiary exceeds a certain debt threshold or declares bankruptcy, the trustee can even decide to withhold payment.
Choosing a trustee is crucial, particularly if they will have broad discretion. This person is often a CPA, attorney, financial planner, investment advisor, or other professional with the requisite experience and financial know-how. It’s also wise to designate a successor trustee should the original trustee become unable to perform their duties.
Additional considerations
While a spendthrift trust offers significant protection, it is not absolute. Government agencies, for instance, may be able to access the trust’s assets under certain circumstances, such as to pay tax obligations.
It’s also essential to define the trust’s duration. You can specify that it terminates after a set period or upon a triggering event, such as a beneficiary reaching a certain age.If you have questions about setting up a spendthrift trust, contact your Smolin advisor to learn if it’s the right choice for your estate plan.