If you have worked hard to create a substantial estate which you plan to pass down to family or loved ones, you undoubtedly don’t want to see the trust assets mismanaged or squandered. One option that is often used during the estate planning process in order to prevent this possibility is the spendthrift trust.
When you create a trust, you appoint a trustee to administer the trust. The trustee has a number of responsibilities including communicating with the beneficiaries, paying out the benefits to the beneficiaries, payment of taxes and other trust expenses and attempting to grow the trust assets. The trustee alone, however, cannot prevent the beneficiaries from mismanaging their trust income or squandering same. A spendthrift trust, however, can.
Although not all states recognize spendthrift trusts, most do. In order to cerate a spendthrift trust, you must use the appropriate language within the trust document. A spendthrift trust prevents the beneficiary from assigning his or her interest in either the principal or income from the trust to a third party. It also prevents a third party from attempting to place a lien on the trust principal or income, or otherwise trying to use the trust assets to satisfy a debt of the beneficiary. For example, a beneficiary cannot use trust income as collateral for a car loan. By the same token, a lender cannot attempt to place a lien on the trust because a beneficiary failed to make the payments on a car loan.