Protecting Your Texas Estate With Spendthrift Trusts

What is a Spendthrift Trust?

A spendthrift trust offers structured disbursement of inheritance to beneficiaries via a trustee. The trust protects the inheritance for use by the beneficiary over an extended period and provides help for beneficiaries who may need help managing their finances.

This type of trust works by appointing a trustee and granting them power to make financial decisions. The trustee is responsible for managing the assets in the trust and distributing funds to the beneficiary as needed for support.

The Spendthrift Clause

The Spendthrift Clause is an essential aspect that protects the contents of the trust. The clause dictates that a beneficiary cannot satisfy debts of a beneficiary with the funds and assets in the trust. If the beneficiary has debts or a civil judgment against them, then the creditors cannot obtain or get to the assets within the trust.

When is a Spendthrift Provision Useful?

There are several circumstances in which a spendthrift provision may be useful, and they are not all based on mistrust of the beneficiary. A major proponent of this provision is that it protects the assets and funds from lawsuits and creditors. 

Other reasons for a spendthrift trust may include:

• Irresponsible behavior from the beneficiary: If one or more beneficiaries has poor money management skills, a substance abuse disorder, or a significant criminal history and will be inheriting substantial assets, a spendthrift trust will ensure that they have support from the grantor but are unable to squander the funds. 
• The beneficiary is a vulnerable person: If a beneficiary is easily manipulated or deceived by others, a spendthrift provision would ensure that the beneficiary is not able to obtain excess money at one time.
• The beneficiary is believed to be in an unhealthy marriage: Assets in a trust cannot be divided during a divorce. If a grantor believes that a beneficiary is in a marriage that will fail, then the grantor may protect the beneficiary by leaving the assets in the trust.
• The beneficiary is young: When potential beneficiaries are young, a spendthrift trust may be necessary to offer structured support.

Is Proof Needed That a Beneficiary is a Spendthrift?

A “spendthrift” is a word commonly used in the 1600s to refer to an individual who is extravagant and recklessly wasteful with money.

To create this type of trust, the grantor is not required to offer proof that the beneficiary is incapable or fails to handle money responsibly. A spendthrift trust can be made for anyone.

A beneficiary can even serve as the trustee of the trust. This designation may be given immediately if they are proven responsible adults or at a later time when they have reached a certain age or maturity to manage the trust themselves.

What are the Benefits of a Spendthrift Trust?

As discussed, there are several benefits to a spendthrift trust, including structured payouts to the beneficiary by the trustee. Additional benefits include:

• Protection from creditors: This trust’s primary advantage is its ability to shield the assets from the beneficiary’s creditors. This may be particularly useful if the beneficiary has an established history of money mismanagement or is at risk of legal claims against them.
• Preservation of assets: When assets are placed under the control of a trustee, the trust ensures that they are used wisely and align with the grantor’s wishes, preserving the trust property for future generations.
• Control over distributions: The trustee is granted authority to supply distributions based on the beneficiary’s needs and circumstances, allowing for a unique and individual-based approach to financial support. The funds may be allocated for education, healthcare, or other necessary expenses.
• Protection from poor financial decisions: When a beneficiary has poor money management skills or is prone to overspending, the trust will act as a safeguard that prevents them from prematurely depleting the trust’s funds.

What are the Disadvantages of a Spendthrift Trust?

While there are many benefits to a spendthrift trust, there are also potential disadvantages (could also be advantages)  that the grantor should consider. Those disadvantages include:

• Irrevocability: An established spendthrift trust is usually irrevocable, which means that the grantor cannot alter or dissolve the trust once it is filed. Careful planning and consideration must be used when creating the trust.
• Selection of the trustee: A reliable and capable trustee is key because this person will have substantial control over the disbursement and management of the assets. Appointing a professional trustee or corporate fiduciary may help ensure impartial and skilled administration of the trust.
• Legal Disputes: Spendthrift trusts are subject to legal scrutiny. Beneficiaries may challenge the trust for a larger or complete distribution of their portion of the assets. Creditors may also challenge the trust if they believe that it was created to defraud them.

Is a Spendthrift Trust Always Irrevocable?

When the trust is created, it can be revocable or irrevocable. An irrevocable trust cannot be changed, but a revocable trust may be dissolved or amended by the grantor at any time. The grantor may choose an irrevocable trust to offer greater protection to the beneficiary or a revocable trust for greater flexibility. Usually a revocable trust will become irrevocable upon the death of the grantor.

How is a Spendthrift Trust Created?

An attorney at Rainey & Rainey, Attorneys at Law, LP, will be able to help establish a trust that is tailored to the client based on their needs. The creation process involves:

• Appointing a trustee.
• Draft the trust agreement.
• Transfer assets into the trust.

Do You Need an Attorney?

If you are considering a spendthrift trust to protect your children or other beneficiaries, both you and them deserve a qualified attorney to offer you the protection and legal requirements necessary to uphold this trust. Call Rainey & Rainey, Attorneys at Law, LP, today at our Waco office at 252-457-5083 or our Georgetown office at 515-598-9005 or fill out a contact form to schedule your consultation.