Do You Need a Spendthrift Trust?

Padlocked Money $100 Bill - Symbol of Spendthrift Trust

If you have worked hard to save for your family's future, the last thing you want to have happen is for those assets to go to waste or end up in the hands of someone other than your loved ones. If you have an intended beneficiary who is young and impulsive, or has a history of poor money management, you need to think long and hard about protecting their inheritance. A spendthrift trust may be the solution.

Having a will is important, but leaving someone assets in a will means that they receive their entire inheritance when the estate is settled. If they want to cash that check, buy a brand new convertible with part of it, then speed down the road throwing hundred dollar bills out the back, no one can stop them.

As a general rule, a living trust is more helpful than a will, in that the trustee may be able to control the flow of assets into the beneficiary's hands. Unfortunately, most trusts may not protect trust assets from creditors. That's where wholly discretionary spendthrift trusts come into the equation.

What is a Spendthrift Trust?

A wholly discretionary spendthrift trust is designed to protect trust assets and anticipated distributions from a beneficiary's creditors. Up until the early 1990s in Ohio, so-called "spendthrift provisions" were not effective against claims of beneficiaries' creditors. This has long been the law in Ohio and was recently reaffirmed with the adoption of the Ohio Trust Code.

As with other types of trusts, a spendthrift trust involves a grantor (also called a settlor), a trustee, and one or more beneficiaries. The grantor creates the trust and places assets in it. The trustee manages the assets and makes distributions. The beneficiary receives distributions from the trust.

What makes a spendthrift trust different is that the document creating the trust includes special language: the spendthrift provision. The spendthrift provision must be carefully worded in order to comply with Ohio law and to be effective. The language generally forbids the assignment of trust assets to creditors, spouses, ex-spouses, and other third parties. The Ohio Trust Code provides that "a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary."

Absent the spendthrift provision, a beneficiary's creditor might place a lien on a beneficiary's anticipated distribution from a trust, or the beneficiary him- or herself might pledge a future distribution to a creditor, or use trust assets as collateral for a loan. The spendthrift language prevents any third party from attaching trust funds until they are actually distributed to beneficiaries. At that point they are fair game.

Not all trust assets are liquid, of course. What happens if the trust holds an asset like a house or car, and the beneficiary wants to use it? Fortunately for beneficiaries, they may be able to use tangible personal property or real estate held by the trust without that use being considered a distribution. However, the trust document must specifically give the trustee the authority to allow such an arrangement.

This illustrates an important fact: words always matter in the law, and this is especially true in the case of drafting a trust with a spendthrift provision. If the wrong language, or unclear language is used in creating the trust, it may not provide the protection that the grantor envisions. If you want to create a spendthrift trust in Ohio, work with an attorney who is deeply familiar with the requirements of such a trust.

Who Needs a Spendthrift Trust?

As mentioned, a spendthrift trust might be a wise choice if you want to leave money or assets to someone whom you suspect might spend the funds unwisely or who is subject to creditors. But spendthrift trusts can be useful in other situations as well.

One common application is to protect trust assets and income from a beneficiary's spouse, including in a divorce proceeding. The spendthrift provision prevents assets in the trust, or future distributions, from being treated as marital property subject to division in a divorce.

Another use of a spendthrift trust is to protect assets for a beneficiary whose work makes them subject to litigation, such as a doctor or lawyer who might be sued for malpractice. The spendthrift provision puts trust assets beyond the reach of judgment creditors in the event your beneficiary is sued.

Is a Spendthrift Trust Right for You?

Spendthrift trusts, when properly drafted, can be useful in protecting both trust assets and beneficiaries from creditors, including judgment creditors. But depending on your needs, a spendthrift trust may not be the best fit. For instance, a spendthrift provision will not help if you are looking to protect trust assets from your own creditors, or if you want to qualify for Medicaid and protect assets from the nursing home. We recommend scheduling a consultation with an experienced Ohio trusts and estates attorney to discuss your needs and the type of trust that may be right for you.

You may also be interested in:

Categories: Trusts