What Is A 'Spendthrift’ Trust? (Part 1 of 2)
Sunday, February 05, 2012
As the name suggests, a “spendthrift” trust is simply a particular type of trust agreement which is designed to protect a beneficiary from wastefully spending his or her share of the trust.
In other words, a spendthrift trust is commonly used when the person funding the trust (called the “grantor,” “donor” or “settlor”) wants to protect a beneficiary from the beneficiary’s own tendency to uncontrollably, imprudently, and usually rapidly, exhaust assets.
Mechanically, spendthrift protection can be incorporated into one’s estate planning in several ways. In certain situations, a complete spendthrift subtrust is recommended for a particular beneficiary, which is typically a sub-trust of the settlor’s own revocable or irrevocable trust and is funded upon the death of the settlor. Another way to take advantage of spendthrift protection is to make sure that a general spendthrift provision is included as part of a trust agreement. In Ohio, Revised Code §5805.01 validates the use of spendthrift provisions, and while the language of spendthrift provisions can vary, the wording promoted by the promulgators of the Ohio Trust Code is as follows: “After my death no interest in income or principal shall be voluntarily or involuntarily anticipated, encumbered, assigned or subject to claims of creditors, spouses, former spouses or others.”
One common scenario in which spendthrift trusts are used occurs where wealthy parents know that one or more of their children are not able to handle money well. In that situation, the parent will typically designate a third party, such as different financially trustworthy family member or a trust company to serve as trustee of the ne’er-do-well child’s share with specific limitations on the child’s right to access the trust assets, and, more importantly, on the rights of the child’s creditors to reach the child’s share.
However, spendthrift trusts can serve other important roles. For example, spendthrift planning is prudent in situations where a beneficiary may be quite astute financially but working in a profession prone to litigation, such as medical malpractice. Parents of an adult child who practices medicine who allocate that child’s share to a spendthrift trust, seal those assets from any attempts of judgment creditors to reach them or any attempts by outsiders to attach a lien against the beneficiary’s trust interest.
Next time: Spendthrift Trusts & Special Needs Planning
Jennifer Lile is a director with Krugliak, Wilkins, Griffiths & Dougherty Co., LPA. Mrs. Lile is a member of the firm’s Estate Planning Practice Group and a former probate court magistrate.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
MD News January/February 2012, Cleveland/Akron/Canton