June212022
Is a Spendthrift Trust Right for You?
T&E Chat
Kevin Wong, Principal, Citrin Cooperman Advisors LLC / Berdon Advisors LLC
06.21.22 | T&E Chat
Do you have a loved one to whom you want to leave money or assets to but who may not be financially responsible? A spendthrift trust may be an appropriate vehicle for you. With the federal gift and estate tax lifetime exemption at an all-time high in 2022 of $12.06 million and adjusted annually for inflation, it may make sense to set up a spendthrift trust before the increased exemption is scheduled to sunset at the end of 2025. However, tax planning is only one consideration when it comes to your estate plan and may not be your most important one. The primary goal is to protect your family by providing them financial security as well as asset protection. A spendthrift trust can help you accomplish this goal.
What is a Spendthrift Trust?
The Oxford English Dictionary defines a “spendthrift” as “a person who spends money in an extravagant, irresponsible way.” Therefore, a spendthrift trust is a vehicle used to protect heirs from themselves. The spendthrift trust will help protect the trust assets while providing for the beneficiary without giving the beneficiary control. The beneficiary will, therefore, be unable to squander away the trust assets.
A spendthrift trust can also be useful with even the most responsible of beneficiaries. It can provide the beneficiary protection from creditors, lawsuits, and relationship changes. In situations where the beneficiary divorces, the beneficiary’s ex-spouse will not be able to claim a share of the spendthrift trust property. In the case of second or more marriages, the spouse would not be able to put their hands in the cookie jar that was meant for your beneficiary and their issue.
Consider a spendthrift trust if you have any concerns that your beneficiary:
- Is not good with money;
- Has a gambling or addiction problem;
- Is easily deceived or defrauded;
- Needs protection from creditors, frivolous lawsuits, and dishonest partners; or
- May experience relationship changes.
How does it work?
A spendthrift trust can be created from a variety of trusts. This can simply be accomplished by including a spendthrift clause. This clause prevents a beneficiary from assigning or transferring their interest, income, or principal in the trust and restricts the rights of creditors to reach the trust assets. Without this clause in place, the trust assets may be available to the creditors. However, this protection is not absolute as government agencies can still reach trust assets to satisfy a tax obligation.
Trustees are important
Trustees will play a key role within a spendthrift trust. The trustee would be in control of the trust property and distributions. The more discretion a trustee is given over distributions, the greater the protection from creditors. If the trust terms require the trustee to make distributions for a beneficiary’s support, a court could rule in favor of the creditor to reach the trust assets. Therefore, it is preferable to give the trustee full discretion over whether and when to make distributions.
Conclusion
A spendthrift trust may be a great addition to your estate plan. A properly designed spendthrift trust will protect your family’s assets while still providing for your beneficiaries. With the federal estate and gift tax exemption still at record highs, now may be a good time to review your estate plan and make any changes as necessary to conform to your goals, tax or otherwise. Discuss with your trusted advisor if a spendthrift trust is right for you or if you want to review your estate plan.
Questions? I can be reached at 212.331.7441 | kewong@berdon.com or contact your Berdon advisor
Kevin Wong is a Senior Manager in the Personal Wealth Services Group of Berdon with nearly ten years of professional experience. He works closely with high net worth individuals on matters involving their personal income tax, family businesses, and fiduciary, gift and estate taxes.