This is an important and common question. You can spend your lifetime scrimping,
saving, and sheltering your wealth, and leave your fortune to your kids
who promptly spend or lose it. So you must also safeguard your beneficiary’s
inheritance. For this you’ll need a spendthrift trust. The spendthrift
trust will protect your beneficiary’s interest in the trust from
his or her judgment creditors and ex-spouses, since there is an anti-alienation
or spendthrift clause in the trust to protect the trust assets from a
beneficiary’s creditors. The antialienation provision prohibits
the trustee from distributing trust assets to anyone other than the beneficiary.
This would include the beneficiary’s creditors. The spendthrift
and antialienation provisions expressly preclude anyone whose interest
is adverse to the beneficiary (a creditor, ex-spouse, etc.) from claiming
the beneficiary’s share of the trust principal or income. However,
these provisions don’t always give a beneficiary absolute protection.
There are limitations. For example, several states don’t recognize
or enforce spendthrift provisions. Nor do spendthrift provisions always
fully protect a beneficiary. Nor does it shelter income distributions
once paid to the beneficiary.
Equally important, in our view, is to give the trustee the discretion to
withhold distributions to the beneficiary. For example, if your trust
provides a beneficiary trust distribution at age 25, will those distributions
be safe if the beneficiary has a judgment creditor or pending divorce
when the beneficiary reaches 25? A discretionary provision allows the
trustee to withhold income and principal distributions that would otherwise
be paid to the beneficiary if the trustee believes the funds would be
lost to the beneficiary’s creditors. A discretionary clause also
prevents a beneficiary from wasting trust assets; an especially important
consideration when your children are the beneficiaries and you want your
trustee to control distributions to your children. If your child isn’t
a spendthrift, is your child’s spouse? You see the point. You also
want to preserve the trust principal for your child in the event your
child dies or divorces and similarly want to protect gifts you place in
trust for your grandchildren or great-grandchildren.
We also commonly add sprinkling provisions to trusts that are expected
to last ten or more years and where each beneficiary’s future income
or tax situation is uncertain. This sprinkling provision lets the trustee
modify trust distributions to determine what, and when, each beneficiary
receives their distributions. But you – as the grantor – would
set the criteria for the trustee’s distributions and specify minimum
income distributions when the beneficiary is your spouse or dependent.