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What is a Spendthrift Trust?

A common concern for people who expect to outlive their retirement nest egg is how their assets will be handled after they pass. This is primarily a concern for people who worry about their beneficiary’s spending habits and exposure to creditors. A solution to this concern is called a “Spendthrift” trust. This type of trust remains in control of the assets of the deceased and distributes assets to the heir on a specified timeline or restrictions. Before getting into the details of this type of trust, it will be essential to understand generally how a trust works.

A trust is a legal arrangement in which one party gives another party the right to hold and administer the assets for the benefit of a third party. Trusts are often desired because it provides a less burdensome estate process for the beneficiaries, allowing the assets to be efficiently distributed by avoiding probate. This process is carried out under the Grantor’s intentions after they have passed away. The key to understanding how a trust works is understanding the roles of each party involved with the trust. There are three prominent roles in administering a trust:

  • Grantor– The individual(s) creating the trust and providing the assets.
  • Trustee– The individual(s) or entity with a fiduciary duty to fulfill the trust’s instructions. This can be a trusted relative/friend or a firm specializing in this role. Often, the latter is chosen when there is concern this duty will cause rifts in relationships.
  • Beneficiaries– The individual(s) receiving the assets from the trust.

Spendthrift trusts, unlike other trusts, do not give the beneficiary access to their inheritance all at once. The trust can be created like any other trust, but it will contain the Spendthrift provision. This provision allows the trust to remain open to hold the assets and gradually disburse them over time to the beneficiaries by following the Grantor’s restrictions and timeline. The benefit of this option is that it ensures the beneficiary will not be able to spend their inheritance all at once. Another advantage is that the assets remain owned by the trust and protect the beneficiary’s inheritance from creditors. This gives the Grantor peace of mind knowing their assets will provide for their heirs without the risk of being mishandled by irresponsible behavior or squandered by debt collectors.

Spendthrift trusts may give the Grantor peace of mind knowing their assets will provide for their beneficiaries without the risk of being mishandled by irresponsible behavior or squandered by debt collectors. For more information on Spendthrift trusts and other trusts, it’s important to discuss the advantages and disadvantages with a financial advisor and an estate planner.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation. Bernicke Wealth Management and LPL Financial do not provide legal advice or services.

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Bernicke Wealth Management, Ltd. (Bernicke) is an independent, multi-disciplinary firm with 25 employees located outside Eau Claire, in Altoona, Wisconsin. Our financial advisers provide wealth management services for individual investors, businesses, foundations, and nonprofits, including investment planning, retirement planning, estate planning, and tax planning.

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