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What Is a Spendthrift Trust and Is It Right for Me?

On Behalf of | May 24, 2022 | Estate Planning

When you choose to bequeath wealth to a family member, you might be concerned that the money or property you’ve worked hard to earn may soon be squandered due to the recipient’s poor financial habits or personal problems. You can protect your loved one and the legacy you leave them by putting it into a spendthrift trust, which we will explain broadly below. A Council Bluffs estate attorney from the Telpner Peterson Law Firm, LLP can help you decide if a spendthrift trust is the right solution for you and your family.

What Is a Spendthrift Trust?

A spendthrift trust is a type of trust whose primary feature is limiting the beneficiary’s access to the assets of the trust. Spendthrift trusts are used when someone leaving property to a beneficiary is worried that the beneficiary may end up quickly losing the property or getting into trouble with creditors. A spendthrift trust provides a beneficiary with some trust assets while protecting against the possibility that the entirety of the trust is squandered.

How Do Spendthrift Trusts Work?

A spendthrift trust is created by an individual called a grantor or settlor, through a trust creation document that includes a “spendthrift” provision. The spendthrift provision in the trust document legally precludes a beneficiary of the trust from accessing the trust property or promising trust property to others, such as the beneficiary’s creditors.

The trust document will name someone to serve as the trustee, the party who manages the trust and its property according to the terms of the trust document. A grantor may choose to name themselves as trustee during their lifetime, but should also name a successor trustee to take over after the grantor’s death. The trustee distributes trust property to the beneficiary or beneficiaries in accordance with the terms of the trust. This usually takes the form of regular payment of trust principal or simply the income generated by the trust principal (such as bank interest or investment dividends). The trust can also direct that the trust principal be released to the beneficiary when they reach a certain age or achieve certain milestones. A beneficiary can only spend or encumber trust property after it is paid to them.

Benefits of a Spendthrift Trust

When an individual decides to make a gift or leave an inheritance to a loved one, they will likely want that money to benefit their loved one for as long as possible. A spendthrift trust can protect a gift or inheritance from being seized or squandered. Spendthrift trusts can be used when an intended beneficiary:

  • Has a history of poor spending habits
  • Has an addiction or a mental health issue that may cause them to quickly squander funds
  • Has a risk of being deceived or defrauded by others
  • Is facing substantial debt or is at risk of falling into unmanageable debt

How We Can Help

The trust attorneys of the Telpner Peterson Law Firm, LLP, could help when you’ve decided that you need a spendthrift trust to protect the assets and money that you are gifting or leaving to loved ones. We are prepared to:

  • Discuss your current situation and financial/estate planning goals to determine if a spendthrift trust may be right for your family
  • Help you understand the benefits and possible drawbacks of spendthrift trusts
  • Guide you on the specific features of your trust
  • Draft the spendthrift trust creation documents as well as other legal documents needed to transfer assets to fund the trust

If you have more questions about spendthrift trusts and whether they might be right for your financial and estate planning goals, contact Telpner Peterson Law Firm, LLP for a confidential, no-obligation consultation with one of our knowledgeable Iowa spendthrift trust attorneys.