Estate planning helps you care for your loved ones even after you pass away. You want the inheritance you leave behind to last your heirs as long as possible, so you draft it in a way to minimize estate taxes and to protect it from creditors. However, you may not be thinking that it’s your heirs themselves who go through their inheritance at an alarming rate. Adding in a spendthrift clause to your trust lets you protect your beneficiaries from poor financial decisions they may make.
In this article, we’ll discuss the things you need to know about trusts and why you should consider adding in a spendthrift clause. If you have any more questions about creating a trust or transferring assets to your loved ones, you can ask our experienced Orange County estate planning attorneys!
Trust Basics
Most people opt for only a last will and testament for their estate plan, thinking that trusts are only for the wealthy. A trust is a fiduciary agreement that lets you avoid probate and leave instructions on how and when you want your beneficiaries to receive their inheritance. It provides greater flexibility and greater control of your assets even after death
Roles Within the Trust
While planning your estate with our Orange County attorneys, you may encounter some terms that are not too familiar. Here is a shortlist of the important people involved in all types of trusts.
1. Grantor / Settlor/ Trustor
This is the person who establishes the trust.
2. Principal / Body / Corpus
This refers to the property that the trust owns.
3. Beneficiary
A beneficiary is a group or an individual who stands to benefit from the trust. They will receive a distribution from the assets held in trust or receive payments. If the grantor is still alive, the assets can only be transferred to lifetime beneficiaries. The group of people to receive the assets once the grantor passes away are the remainder beneficiaries. These two may be the same groups or different groups entirely.
4. Trustee.
This is the person who administers and manages the assets of the trusts. His responsibilities include:
- Making tax filings
- Deciding when assets will be given to the beneficiaries
- Maintaining records of expenses and income
When you pass away, the appointed trustee will be the one managing the trust. Their responsibility includes ensuring that trust is managed properly and your beneficiaries are provided for according to the instructions you leave behind.
A trust is one of the greatest tools for your estate plan. With proper trust, you can continue to provide for your surviving spouse, children, even grandchildren! Get in touch with our experienced Orange County estate planning attorney now to get started on your trust!
Establishing the Trust
There are two steps you take when establishing your trust: drafting the trust documents and funding the trust.
1. Creating the Document
This part is easy. With the help of an estate planning lawyer, you can craft the specific language of your trust to work as asset protection with a spendthrift clause. Contact our Orange County estate planning office so we can craft a trust deed according to your wishes,
Funding a trust involves revising and amending associated ownership documents to reflect each asset or property’s new status under the trust agreement.
2. Funding the Trust
Once you create a trust, you (the grantor) have the responsibility to provide the principal. They can do this by funding their property and assets into the trust. Take note that a trust is its legal entity.
Funding the trust means amending the ownership documents of each asset to show that it’s now under new ownership under the trust agreement.
How Does a Spendthrift Trust Work?
A spendthrift trust is a form of asset protection with provisions that shield your principal from potentially catastrophic choices made by the beneficiaries while allowing the trust to grow under the guidance of the trustee. It also ensures that a part of your estate goes to your dependent, even if creditors go after your estate.
In other words, a spendthrift trust protects your estate from the poor financial decisions of your beneficiaries
Why an Irrevocable Trust Works Best for Protecting Your Assets
An asset protection trust lets you protect your assets from creditors. People usually set up revocable living trusts (sometimes called just “revocable trusts”), which lets them add or remove assets from their trust while they are alive. Asset protection trusts are irrevocable trusts. Once you’ve set it up, it’s impossible to modify the terms any longer. Revocable trusts become irrevocable upon your death and the terms cannot be amended.
An irrevocable trust is much more difficult to revoke than a revocable trust. An irrevocable trust takes away control of the assets from the grantor, making it much more difficult for creditors to go after assets held in trust. Separating the assets from the grantor also protects it from certain estate tax liabilities. Since a trust is its entity, creditors that go after you cannot go after your assets in the trust.
How Asset Protection works with a Spendthrift Clause
The wording of the trust must be worded explicitly to state that it separates the grantor from all the trust assets. Heavy regulations are also set in place for these kinds of trusts. When a spendthrift clause is added onto the asset protection trust, the wording makes it so that:
- The beneficiary cannot spend nor sell the trust’s principal without specific requirements;
- The beneficiary cannot decide when or how the property will be distributed,
Domestic vs Foreign
Asset protection trusts can be domestic or foreign. Here’s a summary of the main differences between them:
Domestic Asset Protection Trust
These kinds of trusts are set up according to state law. They are much easier to establish but provide less protection.
Foreign Asset Protection Trust
These are set up and governed by the trust law of a country outside of US jurisdiction. These are much more complicated to establish, but provide more protection as it’s more difficult for a US creditor to claim it.
For both these cases, you still need a skilled estate planning attorney to word the documents carefully to adequately protect your assets and fulfill your wishes. Talk to our experienced Orange County estate attorney to discuss what you plan to do with your estate.
Final Thoughts
A spendthrift trust lets you protect your assets from potentially costly decisions by your beneficiaries even when you’re deceased. Given the complexity of these kinds of trusts, you need a skilled estate planning lawyer to help you set it up.
If you’re a resident of Orange County and need legal advice in the matters of estate planning it’s best to talk to our attorneys at Treviño Law, Inc. Our attorneys can also help you draft your last will and testament. You might also want to have things such as an advance health care directive or a durable power of attorney.
Call our Orange County estate planning office now for a free consultation!
