What Is A Spendthrift Trust?

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What is a spendthrift trust? It is a trust that includes what’s called a spendthrift provision. You can for the most part use any kind of trust, and make it a spendthrift trust by including a special clause that is added to the trust document.

What a spendthrift provision does, is to prevent the creditors of any beneficiary from reaching their assets, as long as they remain in the trust.

It can also be useful in the case of an irresponsible beneficiary (trust fund kids), who might want to spend the trust assets recklessly. Whenever this clause is included, a beneficiary cannot take out credit on the trust assets by using them as collateral. The trustee who manages the trust, can even pay a beneficiary’s expenses instead of making a direct distribution.

What Is A Spendthrift Trust - Infographic

How the trust assets will be managed, must be carefully planned with the trustee. A beneficiary’s needs can be unique, and therefore it’s a good idea to plan everything well in advance before the trust is finalized.

The spendthrift rule is recognized in most English speaking countries, and is a very effective tool to include in your trust. It’s also important to know that a spendthrift clause doesn’t help the settlor who creates the trust. Meaning, if you create a trust and specify yourself as a beneficiary, you won’t have any spendthrift protection.

That is one of the reasons it’s a good idea to set up an asset protection trust offshore, in a jurisdiction with such strong asset protection laws that you don’t have to worry about the spendthrift clause. But it’s still useful, as an added layer of defense, which gives your beneficiaries additional protection. You can’t use it for yourself, but for any other beneficiary it works really well.

What I’ve gone through so far might seem complicated, and confusing. A common concern a lot of people have when doing their research on trusts is where to start. Of course, you could do everything yourself, it’s certainly possible. Even though it’s not a very simple process.

Including a spendthrift clause isn’t the only thing you have to consider, but how to formulate the complete trust in the right way. It’s a good idea to include a knowledgeable adviser when setting up your trust, who can create a plan for you, and choose the best providers to finalize your asset protection trust. You can always do everything yourself, but chances are that you will miss a few very important components that ideally should be included.

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Fredrik helps high net worth individuals with creating international asset protection strategies. To keep anything from currency, real estate, precious metals and any other kind of investment protected from an unexpected lawsuit.