What is a Spendthrift Trust, and When Would You Need One?

Whether we like it or not, wealth can sometimes cause more problems than it solves. An inheritance, legal settlement, or other financial windfall can vanish quickly if proper precautions aren’t taken. Spendthrift trusts can provide the protection you or your heirs need.

As experienced Colorado estate planning attorneys, we’ve seen many examples of how unrestricted access to sudden wealth can go awry. Addiction, financial mismanagement, crippling debt, lawsuits – there are myriad ways for an unprepared beneficiary to lose their financial security.

Fortunately, the spendthrift trust allows grantors to responsibly provide for beneficiaries while limiting their ability to waste the funds. The unique “spendthrift clause” is what makes these trusts special, as you’ll see below.

What Exactly is a Spendthrift Trust?

In short, a spendthrift trust offers customized control over an inheritance or other gift to protect beneficiaries from themselves as well as outside threats like creditors. The Hammond Law Group can help craft the ideal spendthrift trust for your specific situation.

These specialized trusts include provisions preventing beneficiaries from freely assigning away or otherwise squandering their beneficial interests. Known as “spendthrift clauses,” these provisions allow grantors to leave gifts to loved ones while still promoting responsibility and guarding the financial legacy they worked so hard to build.

The Key Players in a Spendthrift Trust

Every spendthrift trust involves a few key roles, each with important duties:

• The Grantor – This person establishes the trust, guides how it should function, and names beneficiaries. Estate planning lawyers commonly help clients create spendthrift trusts as part of comprehensive plans.
• The Trustee – An individual, financial institution, or other entity manages the trust’s assets in the best interests of beneficiaries per the grantor’s instructions. They oversee investments, authorize distributions, file tax returns, and more.
• The Beneficiaries – Those receiving interest in the trust, with specifics varying based on each arrangement. The spendthrift clause limits their control.

When structured properly, this division of roles promotes responsible wealth stewardship across generations per values important to the grantor.

When Might I Need a Spendthrift Trust?

Spendthrift trusts provide vital protection in several common scenarios:

Safeguarding Assets from Creditors

By restricting beneficiaries’ ability to transfer interests in the trust, spendthrift provisions also prevent creditors from targeting trust assets. This makes the arrangement helpful for beneficiaries in positions of financial risk.

For example, spendthrift trusts are useful estate planning tools for:

• Physicians concerned about malpractice exposure
• Professionals with high liability such as directors & officers
• Beneficiaries facing potential bankruptcy or large debts

By properly drafting a spendthrift trust, grantors can provide a lasting gift even for heirs facing creditor risks.

Protecting Assets from Irresponsible Beneficiaries

Unfortunately, not all heirs properly manage sudden wealth. Spendthrift trusts allow grantors to enjoy peace of mind that their legacy promotes their loved ones’ best interests.

Those suffering from mental health challenges, addiction, financial abuse, or simply money management difficulties can benefit tremendously from the trustee’s guidance over distributions. For minors and young adults, these arrangements also provide a safe transition into maturity.

The customized restrictions in a spendthrift trust balance beneficiaries’ needs and vulnerabilities to encourage growth. Trust assets further incentivize beneficiaries to develop productive behaviors.

Preserving Wealth Across Generations

Perhaps most importantly, spendthrift trusts provide proven protection against beneficiaries themselves. By restricting their rights, these arrangements preserve wealth for heirs rather than allowing assets to be squandered.

Statistics show that 70% of wealthy families lose their wealth by the 2nd generation, and 90% do so by the 3rd. Proper estate planning is key to sustaining your legacy. Spendthrift provisions offer time-tested security unavailable through outright inheritances while still allowing beneficiaries to receive lasting value from your gift on your terms.

Key Considerations in Creating a Spendthrift Trust

If a spendthrift trust seems suited to your family’s needs, some key decisions arise in designing this arrangement. As estate planning counselors familiar with these nuances, the Hammond Law Group advises clients on aspects like:

Irrevocable vs. Revocable Trusts

Depending on state law and overall goals, spendthrift provisions may be included in either irrevocable or revocable trusts. Each offers advantages:

• Irrevocable – As the name suggests, these cannot be changed once made. This provides maximum asset protection but less flexibility.
• Revocable – The grantor retains the right to amend the trust. This allows changes as situations evolve, but assets aren’t as shielded as well as with irrevocable trusts.

Complex factors will determine the best type of trust for each case.

Selecting a Trustee

Choosing an appropriate trustee is essential to administering a spendthrift trust properly over time. Personal traits like integrity, impartiality, investment savviness, and communication abilities all matter when screening candidates.

Trustees have an important balancing act – restricting spendthrift beneficiaries enough to protect assets while still allowing funds to meaningfully enhance their lives. This takes judgment and wisdom.

Common Trustee options include:

• Family member or friend – Pros include familiarity and low costs, but the ability to remain objective can prove challenging.
• Professional advisors like attorneys or accountants – They will possess the technical skills but may lack personal understanding of beneficiaries.
• Corporate trustees, such as the trust departments at banks – Similar to professional advisors but with more skills and resources, often at higher costs.

Colorado offers a range of quality corporate and professional trustees. As estate planning lawyers, the Hammond Law Group can help you thoughtfully weigh all alternatives to match you with the best possible stewards.

Estate Planning and Other Legalities

While spendthrift provisions provide vital protection on their own, incorporating this concept into a holistic estate plan is key for maximum security. Using wills, beneficiary designations, and joint accounts together with properly tailored spendthrift trusts can ensure all angles are covered.

Unfortunately, the patchwork of state laws means creditor rights, spousal protections, and trust enforceability vary nationally. In Colorado, carefully structuring any legal estate documents can provide you with robust protection when creating or benefitting from spendthrift trusts.

Given the nuances involved, seeking experienced estate counsel can help you avoid pitfalls while capitalizing on any opportunities unique to your situation.

Frequently Asked Questions

How is a spendthrift trust different from other trusts in Colorado?

A spendthrift trust contains special provisions that restrict beneficiaries from transferring or assigning away their interests. This protects assets from both irresponsible spending by beneficiaries as well as attachment by their creditors. Trustees manage distributions and investments.

Who can benefit from a spendthrift trust under Colorado law?

Any beneficiary for whom a Colorado settlor wishes to set aside funds can benefit from the protections of a properly crafted spendthrift trust. Family, friends, employees, special needs individuals, and public charities are all suitable recipients.

Can marriage creditors access spendthrift trust assets in Colorado?

In general, no. Marital creditors do not have special rights to access spendthrift trust proceeds unless exception circumstances exist, such as the trust was created specifically to defraud a spouse. Trusts properly established prior to marriage receive strong protection.

Provide Peace of Mind Through Spendthrift Trusts

The rewards of entrepreneurship, investments, and hard work shouldn’t end with you. However, thoughtfully stewarding wealth across generations is easier said than done. By restricting beneficiaries for their own benefit, spendthrift trusts provide time-tested protection not found elsewhere.

Yet, no two family situations are the same. The flexibility of thoughtfully designed, bespoke arrangements that align with other estate planning tools can uphold your goals and values while still allowing loved ones to thrive.

At the Hammond Law Group, we focus on exactly this – building customized estate plans around spendthrift and other protective trusts designed through compassionate counsel.

Whether protecting an heir from addiction, managing special needs sustainably, or simply passing a business to the next generation intact, our peer-honored attorneys have successfully guided Colorado high-net-worth families through life’s transitions. Schedule an initial consultation today to start planning for your future.