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Trust 101: Spendthrift trusts

Posted by James Kridel | Feb 21, 2016 | 0 Comments

What is a trust?

Very simply put, a trust is a device that allows your contemplated beneficiaries to skip the Court process of probate, as to the assets that you wish to have them receive directly. This saves time and money with respect to Court and attorney fees, and likely additional grief after your loved one passes.

Assets that you wish to leave your beneficiaries are held in a trust by the Trustee. The Trustee and the beneficiary may be the same person, or if the beneficiary is a minor or someone who should not have control over the trust, another Trustee may be appointed. More than one beneficiary or Trustee may be designated.

Trusts are also a useful tool in avoiding certain types of taxes so that your beneficiaries can receive the most benefit possible.

What is a spendthrift trust?

A spendthrift trust is a form of trust that limits the beneficiary's access to the trust principal. This protects the property from:

  • A beneficiary who might squander the trust property;
  • The beneficiary's creditors; or,
  • A bankruptcy Trustee. It may well be possible to escape the recapture rules of the Bankruptcy Code, i.e., wherein an inheritance received within 180 days of the discharge must be paid over to the Trustee.

These types of trusts are usually made by a grantor who wants to leave assets to a beneficiary, but is either worried that he or she isn't responsible enough to manage it well or who has creditors who will try to take it. A spendthrift trust ensures that a beneficiary is taken care of and gives the grantor peace of mind.

How does it work?

A spendthrift trust places restrictions on the access to the trust by the beneficiary and his or her creditors. A Trustee is named in the trust, who determines how to make payments to the beneficiary in accordance with the terms of the trust. It is important to note that once property is distributed to the beneficiary, creditors may have access to it as well.

Terms of the Trust

Because a spendthrift trust is used to protect a beneficiary from losing the property of the trust, such beneficiaries are often:

  • Inexperienced with finances;
  • Suffering from an addiction that could cause them to squander the property;
  • Easily defrauded or deceived; and/or,
  • Likely to fall into debt with creditors.

A spendthrift trust must be very specific with regard to the circumstances underlying the trust. The appointment of a Trustee is a very important consideration, since he or she is the person with the burden of distributing the property to the beneficiary.

Making a spendthrift trust

Get help with creating a spendthrift trust from an attorney versed in estate law. Serving clients in New Jersey, we have the knowledge and experience to ensure that your wishes are carried out and your loved ones are taken care of. Contact us at [email protected] or call us at (973) 470-0800 to schedule a consultation at our Clifton, New Jersey office today.

About the Author

James Kridel

James A. Kridel, Jr. brings a wealth of business, legal, military and life experiences to his law practice. For four years Mr. Kridel served as a special agent for the United States in the field of Counterintelligence, which resulted from his voluntary service with the United States Army during Vietnam. Before starting his own law firm, he was the tax partner at a previous firm.

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