Q: Can a spendthrift trust protect my child’s inheritance?
A: Dear Concerned:
Yes, a so-called spendthrift trust can be quite effective at protecting your child’s inheritance. But the term “spendthrift trust” is a bit of a misnomer.
A spendthrift trust isn’t a specific type of trust; it’s simply any trust that contains a spendthrift provision. The provision often takes the form of a single paragraph indicating the trust intends to offer spendthrift protections.
The spendthrift provision is aimed at preventing beneficiaries from squandering the trust assets. It does so by prohibiting beneficiaries from spending, borrowing against, assigning, or selling the trust’s funds until they’re released by the terms of the trust.
The provisions can also prevent the beneficiary’s creditors from being able to access those same assets as long as they’re held in the trust. Without a spendthrift clause, if there are creditor claims against the beneficiary, the trust assets can often be accessed by creditors before they’re distributed.
So, if a trust’s terms dictate your child will receive a certain amount of money upon completing college, he or she has no way to get those funds until graduation. Similarly, creditors will be unable to access the funds to resolve the child’s debts until the money is released upon his or her finishing college.