The Benefits of Using a Spendthrift Trust
If you have worked hard throughout your life, you may be in the position to leave your children and grandchildren a considerable amount of money or assets. This can make you feel good about being able to take care of your family after you are gone, yet it can also make your worry about your kids or grandkids’ independence and frugality. There are often one or two family members who are not good at managing their finances. Leaving them money without a few stipulations may not be the smartest idea. That is where spendthrift trusts come into play.
What is a Spendthrift Trust?
A trust is a legal vehicle used to transfer the ownership of property from one individual to another for the benefit of that individual or a third-party, known as the beneficiary. The individual who creates the trust places money, real estate, or other assets into the trust and then a trustee maintains the trust for the beneficiaries.
A spendthrift trust is a type of trust that limits the beneficiaries’ ability to touch the assets within the trust without the trustees’ approval. Instead of having free reign with the trust, the beneficiary receives funds only with the approval of the trustee. Their receiving money from the trust is not automatic or guaranteed.
Spendthrift Trusts in Virginia
In Virginia, these are known as self-settled spendthrift trusts and there are multiple elements that must be met to create one:
- The creator of a spendthrift trust is not allowed to put so many of his or her assets into the trust that he or she becomes insolvent. The creator has to keep enough assets to meet his or her current financial obligations.
- The trust cannot be used to deceive or avoid creditors. Any creditors who had claims against the assets transferred into the trust at the time of its creation can sue to collect from the trust.
- The trust must always have an independent qualified trustee. Other types of trust allow the creator to also be the trustee, however, this is not allowed for spendthrift trusts. Also, the trustee must live in Virginia, or if it is a business, then be licensed in the state.
- The trust must be irrevocable, which means the trust creator cannot simply dissolve it or change the conditions whenever he or she wants to.
- The creator may be a beneficiary of the spendthrift trust, but there also must be at least one other beneficiary.
- The creator cannot retain the right to deny distributions from the trust.
The Benefits of a Spendthrift Trust
The entire purpose of a spendthrift trust is so that the beneficiary cannot simply spend all of the money left to him or her by family. This is very important for individuals who have trouble managing their finances or controlling their spending. The trust may have specific conditions regarding when to give the beneficiary money and how much. However, these trusts historically rely a great deal on the trustee’s discretion.
This distance between the beneficiary and trust assets makes it so the beneficiary’s creditors cannot pursue the trust’s assets. This is important if the beneficiary is so irresponsible as to rack up a lot of debt. A trustee has discretion in paying off some or all of a beneficiary’s debts. However, the creditors cannot put a lien on any of the trust’s assets, thereby protecting the trust from the beneficiary’s carelessness or recklessness.
Do You Need Help Creating a Trust?
If you are trying to plan for your future and you believe a spendthrift trust might be right for you and your family, then contact the Leesburg estate planning attorneys of Whitbeck Cisneros McElroy PC at 703-997-4982. We can help you today.