A spendthrift trust can protect assets while enforcing trust beneficiaries’ responsible use of money. Someone can create a spendthrift trust during their lifetime or after their death through language in their will.
The trust simply needs to include a spendthrift provision, which restricts the beneficiary’s legal interest in it until a distribution is made.
Spendthrift provisions are common for trusts used for asset protection as well as those that have younger beneficiaries. Someone may also decide to set up a spendthrift trust as part of estate planning to protect heirs who could fall into trouble if they accessed all of their trust interest at once.
An Albuquerque spendthrift trust lawyer can help you weigh your options and customize your trust to perfectly fit your unique situation. Book a no-obligation consultation at New Mexico Financial & Estate Planning Attorneys today when you call us at 505-503-1637 or contact us online.
Spendthrift trusts are commonly used by families that have concerns about young spenders, creditors, addiction, or irresponsible habits. The person forming the trust may also want to ensure that their beneficiaries still feel encouraged to find their own way, rather than trading off their trust interests to cover their living expenses.
If you are interested in creating a spendthrift trust, reach out to schedule a consultation with New Mexico Financial & Estate Planning Attorneys. We can provide you with an Albuquerque spendthrift trust attorney to assist you, guiding your attention toward the most important things to keep in mind. Your attorney will be able to assist with tasks like:
Once your spendthrift trust is formed, an attorney can still provide you with assistance over the long haul. If you or your trustee ever need legal support, we are here for you.
An experienced Albuquerque spendthrift trust lawyer can answer questions, represent your trust in legal action, and help you deal with any challenges as they arise. You can rely on our firm for the protection of your trust arrangements for many years to come, helping your loved ones benefit without risking their health, safety, or happiness.
Like other types of Albuquerque trusts, a spendthrift trust has three main types of legal parties:
Spendthrift trusts are different from other trusts because they include a special provision. This provision states that the beneficiary is not allowed to transfer their interest in the trust to another party and cannot request receipt for all of their interest at once.
In the words of insurance company MetLife: “This caveat permanently designates the trust itself as the sole owner of the assets held within it, rather than transferring ownership to your beneficiary upon your passing.”
Under normal trust arrangements, it can be possible for a beneficiary to treat all of the money they are entitled to as a single “present interest.” This interest could, in theory, be transferred to other parties.
The beneficiary might, for example, use the trust interest as collateral for a new loan. They may also transfer their interest to another party to pay off a debt.
A spendthrift provision prevents any such transfer of interest from occurring. It reserves full rights to all trust assets until they are transferred.
Through this arrangement, the beneficiary is only entitled to receive their portion of the trust in smaller increments.
Note that in New Mexico, as well as in other states, a spendthrift provision cannot be enforced unless it prevents both voluntary and involuntary transfers of a beneficiary’s interest (NM Stat § 46A-5-502)
A spendthrift trust can be revocable if it was created during the grantor’s lifetime. With a revocable trust, the grantor can make modifications to the trust or access the principal assets at their discretion.
Because a beneficiary could pressure the grantor to change the spendthrift trust or to dissolve it and give them their money at once, it is usually advisable to limit the grantor’s powers in a revocable spendthrift trust. Alternatively, the grantor could use an irrevocable trust and nominate a third party as trustee to completely remove any reason for a beneficiary to pressure them.
An irrevocable spendthrift trust cannot be significantly changed or revoked once it is created. Beneficiaries are only able to modify or dissolve the trust if they are all in unanimous agreement. They may also need a court order in many cases.
A spendthrift trust may include provisions discouraging beneficiaries from trying to modify it. For example, the trustee could have absolute discretion over whether to agree to the request.
The trust could also include a provision that reverts the beneficiaries’ claims to $1 if their efforts at amending or dissolving the trust fail.
A living spendthrift trust is created during the grantor’s lifetime. As mentioned above, it may be advisable for the living trust to be irrevocable so that the beneficiary is unable to pressure the grantor to release their entire trust interest at once.
Alternatively, the grantor could create a living trust that does not provide any distributions until after their death. With this arrangement, the grantor can avoid disclosing the full extent of the beneficiary’s interest in the trust and delay distributions until after they have passed.
Spendthrift trusts are also commonly formed as testamentary trusts, meaning they are created through a provision in the grantor’s will. Because the grantor is dead, the trust is automatically irrevocable, and a trustee is put in charge.
One advantage of using a spendthrift clause is that it could keep a beneficiary from racking up debt or using their trust interest to pay off a pre-existing debt. Because beneficiaries cannot receive trust distributions until the trustee releases them, creditors may be unable to access the beneficiaries’ interest all at once.
Put another way: a beneficiary’s creditors have no legal claim to the trust’s assets because they don’t even belong to the beneficiary yet.
However, the degree of asset protection afforded to the trust and beneficiary depends entirely on the laws of the state where the trust was formed. In New Mexico, for example, along with many other states, a spendthrift provision cannot protect against certain kinds of claims (NM Stat § 46A-5-503), including those related to:
With the last type of claim, a creditor could secure up to 10% of the beneficiary’s trust income at a time until their debt is paid. In some cases, the creditor can also successfully argue before the court that the trust’s assets go beyond what the beneficiary reasonably needs to support themselves.
In this case, the court may try to garnish more than 10% of the beneficiary’s trust income. The trustee may even be ordered by the court to release excess funds in extreme cases.
Other states like Nevada, Alaska, Delaware, and South Dakota have stricter asset protections for spendthrift trusts. In Nevada, for example, a spendthrift trust that uses other asset protection measures can be protected even from child support or alimony claims.
Talk to an Albuquerque spendthrift trust attorney if your goal is to secure firm asset protection.
If a grantor wants to enhance the asset protections offered by a spendthrift trust, they can also give the trustee absolute discretion over distributions. This means that the trustee has the legal right to refuse to make a distribution of any kind, according to their own judgment.
For a discretionary trust to be valid, the trustee has to be given explicit standards of distribution to understand when a transfer might be warranted. Common examples of conditions that could be applied include a situation where the beneficiary:
The trust language could denote the value of the distribution in each described situation, such as by suggesting to the trustee to release $3,000 to the beneficiary monthly. Or, it could leave the distribution amount entirely to the trustee’s discretion.
For example, the trustee could review the beneficiary’s living expenses, determine what is reasonable, and only pay the exact amount needed to continue supporting them.
A spendthrift provision is commonly seen in trusts that will support children, younger beneficiaries, or people close to the grantor who may be prone to falling on hard times.
Accordingly, a spendthrift provision may be included in certain types of trusts that might otherwise tend to pay out large sums of money at once, including the following.
Life insurance policy proceeds are usually paid in one lump sum or a quick succession of payments. Suppose a grantor wants to avoid having a beneficiary receive a lot of money at once.
In that case, they can include a spendthrift provision and keep the policy proceeds in trust for a predetermined period. The beneficiary can then receive a steady income stream from the trust rather than a large lump sum.
Using their will, parents might instruct their estate representative to put assets into a trust if they die while their children are still minors. The child (or children) would then receive distributions after they turn 18, or at another chosen milestone.
If parents are wary of how an 18-year-old might handle a large inheritance, they can form a spendthrift testamentary trust and instruct the trustee to only distribute a reasonable amount to them regularly. Then, when the child gets older, they may inherit the remainder.
A charitable lead trust makes regular payments to a charitable organization for a set number of years. When the term is up, non-charitable beneficiaries — such as the grantor’s children or relatives — can inherit the trust’s remaining assets.
This remainder interest could be a substantial windfall, especially for someone who is young or generally irresponsible with money. To protect the beneficiary, the grantor of a charitable lead trust could instead name a spendthrift trust as the beneficiary.
The remainder of the assets can then stay in the trust and be received gradually by the beneficiary.
Trust funds can easily get certain people into major financial or personal trouble. They may not even be able to use any of their trust funds whatsoever if they are facing substantial creditor claims.
A spendthrift trust provides for such beneficiaries responsibly while safeguarding the trust’s remaining assets from unwanted parties.
Our Albuquerque trust law firm can help you find the optimal way to use these helpful arrangements. Find out how your family might be able to benefit from a spendthrift trust when you call 505-503-1637 or contact us online to schedule a case review.
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