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What is a spendthrift trust and why would I use one?

On Behalf of | Aug 30, 2021 | Estate Planning |

Many residents in New Jersey have wealth that they would like to leave to their children or other close relatives.

The problem many run into is that they know that these relatives are financially vulnerable people. The fortune that they hope will assist their relative for a long time could get squandered quickly as a result.

This is where a spendthrift trust may be helpful to Morristown residents planning their estates.

A spendthrift trust is often irrevocable, meaning that once it is set in motion, the people who created it cannot later change their minds.

The unique feature is that, after the creators have died, a trust with what are called spendthrift provisions will continue.

The document will also clarify that the beneficiary of the spendthrift trust is not able to access the money. The trust may allow the beneficiary to receive income from time to time.

As an estate planning tool, the spendthrift trust effectively keeps a person and his or her creditors from accessing the principal amount in the trust.  It is important that these be drafted correctly so that the trust actually offers this protection.

Spendthrift trusts are not just for people with financial problems

The spendthrift trust gets its name because people would use them to make sure that a loved one with a history of financial problems or irresponsibility does not spend all the money that is in the trust.

This concern is to this day a good reason to set up a spendthrift trust. On a related point, families who have children struggling with alcoholism, gambling addiction or substance abuse may want to consider a spendthrift trust.

A spendthrift trust is also good if a generally responsible beneficiary has creditors or potential creditors, such as an ex-spouse.

With a properly established spendthrift trust, a creditor will only be able to seize any income the beneficiary receives from the trust, but not the person’s share of the trust itself.

Those who are interested in a spendthrift trust should consider speaking to an experience attorney about this option.