BULLETPROOF YOUR KIDS’ INHERITANCE
What is a spendthrift trust?
A spendthrift trust is a trust that is created for the benefit of a person who is often unable to control his or her spending and gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary. Spendthrift trust are often established when the beneficiary is too young, immature, or doesn’t have the mental capacity to manage their own money and wants to protect a beneficiary from the beneficiary’s own tendency to uncontrollably, imprudently —and usually rapidly— will exhaust assets.
Spendthrift trust – a simple example
This is best illustrated by a simple example. Mom & Dad set up a living trust for their children and put $500,000 principal into it to be held for the benefit of the children. Suppose one or more of the children has financial trouble and owes money to creditors. With a properly written spendthrift clause in the trust document, the creditors of the children cannot enforce their claims against the children’s share of the trust. The trustee of the trust still would be have discretion to pay money out to the children. People also can set up trusts to benefit themselves but those types of trust are subject to more limits on the spendthrift provisions.
General rule-transfers to creditors can be prohibited
California law generally allows a trust instrument to legally provide that a trust beneficiary’s interest in trust may not be transferred and may not be subject to enforcement of a creditor’s money judgment. Thus, in the $500,000 put into the trust in the above example, if the money is to be held in the trust until the children reach age 35, then before the children reach that age a creditor with a money judgment against the children cannot reach that money. However when a child reaches age 35 in the example and is entitled to his trust principal distribution, the child’s creditors can get a court order to have the child’s principal paid to the creditors to satisfy the judgment. Likewise, if the trust provides for discretionary payment of trust income to trust beneficiaries (as opposed to mandatory payment of income) then the children’s creditors cannot force the trust to pay the income to them.