Creating A Spendthrift Trust In California

creating a spendthrift trust in california

One of the most empowering things about creating this in an estate plan is the ability to thoughtfully distribute your assets in a way that honors your values and what you determine to be best for the whole when you are no longer able to control your assets, savings, and investments. In some cases, this means creating a spendthrift trust.

Benefits Of a Spendthrift Trust for Non-Thrifty Beneficiaries

You can get exceptionally creative when planning your trusts; a spendthrift trust is an example. Regardless of whether or not you decide to split your estate evenly between your heirs and beneficiaries, siblings or children, you have the prerogative of setting the parameters for how each person’s inheritance is distributed.

So, for example, let’s say you have three children. Two of them have proven themselves responsible in the financial arena. However, one of your children spends money as soon as it touches their hands or transfers into their bank account. While some people figure an inheritance is an inheritance, and a beneficiary should be able to spend them however they choose, others want to support the financial security of their children are beneficiaries if they have a harder time managing money. In this case, a spendthrift trust is a wise idea.

As long as you’re focusing on setting up an estate plan that protects beneficiaries from unnecessary taxes, penalties, or probate fees – it makes sense to establish a spendthrift trust for any beneficiary who you worry will spend the money recklessly and without regard to their future financial security. 

NOTE: A spendthrift trust is very different from a special needs trust. If a disability prohibits your child from being able to manage their money, speak to your estate attorney about establishing a special needs trust. Spendthrift trusts are purely designed to support able-minded people from being irresponsible with lump-sum Legacies.

How does a spendthrift trust work?

When you create a spendthrift trust, you dictate how much an individual beneficiary receives as well as how/when they receive their inheritance. In some ways, an age-related trust is one version of a spendthrift trust. We have plenty of clients who set specific ages, determining how old their beneficiaries must be to receive larger sums of money. This is very common for parents or grandparents who list minors or young adult children in their trust and know they know will be tempted to spend money unnecessarily and regret it later on. In this case, they set an inheritance age of 25, 30, or even older depending on their beneficiary’s personality type and spending history.

A spendthrift trust is similar in some ways and can be age-related, but it also creates greater specifications and how somebody receives their assets or monetary inheritance.

The assets belong to the trust

When you put your money in a spendthrift trust,  the money belongs to the trust rather than the beneficiary of the trust. And that trust is governed by whomever you select as the trustee or executor of the estate. Your beneficiary cannot take anything from the account other than what has been decided during your estate planning process.

You determine how funds are distributed

You have a tremendous amount of leeway and how the funds are distributed.  these decisions are typically based on the total amount of a particular trust fund. Here are some of the most common solutions for the measured distribution of spendthrift trust funds:

  • Dividend-only distributions. If the trust is quite sizable, such as two million dollars or more, then you may consider distributing the dividends from the trust’s investments to your beneficiary rather than the lump sum amount.
  • Annual, quarterly, or monthly distributions. You can also choose to have the trust distributed within established time frames, such as annually, quarterly, or monthly.  the trust can specify the amount per distribution, limiting how much money the beneficiary has at any one time. Unless there is addiction in the picture, this type of distribution becomes a regular income, more likely to support essential and some fun spending rather than the spending sprees more likely when money comes in larger, single-distribution sums.
  • Specified spending. You can go a step further and get more specific as to how some or all of those funds are spent. Maybe you create the trust in a way that ensures larger lump sum payments can be made directly by the trustee for college or university tuition, trade school tuition, to purchase a car when necessary, or to be used as a down payment on a house. All of these can be managed by the trust trustee.

Establish a trustee for the Spendthrift Trust

This type of trust requires a special trustee. The average estate trustee spends about 12 to 18 months working through all of the estate parameters. At that point, their job is done. As with other trusts governed by longer-term specifications, a spendthrift trust requires a special trustee. While there are exceptions, an estate planning attorney or financial advisor is probably your best bet.

Estate planning attorneys and financial advisers have a much greater capacity for handling long-term trust instructions, especially those that will be stretching in two years or decades. Their level of professionalism ensures the trust will be taken care of for years or decades into the future without personal hardships, conflicts, or the death of the trustee complicating the process.

Schedule Your Estate Planning Consultation with Tseng Law Firm

Are you struggling with how to handle your estate and heirs or beneficiaries that may not be as frugal or financially responsible as you would hope them to be? It sounds like a spendthrift trust might be an ideal solution. Schedule an estate planning consultation with Tseng Law Firm. We love working with clients and creating personalized solutions that help them feel more confident about the future of their estate.