Spendthrift Protection Protects Your Beneficiaries: But How?

 Posted on December 15, 2022 in Estate Planning

What is Spendthrift Protection?

Spendthrift protection is the benefit provided to a trust that protects a beneficiary’s inheritance from a beneficiary’s creditors such as a divorcing spouse or a creditor such as a credit card provider or a business lawsuit or a mortgage foreclosure among other creditor issues.

One of the primary benefits of a spendthrift provision is to protect a beneficiary from themselves. Spendthrift also is putting restrictions on a person’s inheritance with the primary intent to protect their child or children from their immaturity or lack of fiscal management skills. 

Spendthrift language in a trust is required to protect a beneficiary’s inheritance from their creditors. This type of language is called a “Spendthrift Trust” or “Spendthrift Provision.”  Parents often desire to protect young adults (21 to 25 years of age) or with serious disability issues from themselves. A beneficiary may not be technically disabled, but parents desire to protect their loved ones from themselves. Spendthrift language provides asset protection for a trust beneficiary because their inheritance may not be assigned, encumbered and/or alienated in any way (or similar language). 

Protections of a Spendthrift Trust

A beneficiary of a living trust or otherwise known as an “inter vivos trust” or “revocable living trust” have spendthrift protection when this paragraph of a trust agreement is drafted into the living trust. The spendthrift protection employed in a trust agreement must be irrevocable. Irrevocable means that the trust makers must have deceased (or became incapacitated) and they cannot revoke the terms of the trust agreement.

On the contrary, a revocable living trust with the trust makers still living are subject to creditors’ concerns because a revocable living trust is like owning property or assets in one’s personal name. Thus, the difference between a revocable and irrevocable trust in this instance is the fact that the trust maker cannot revoke or amend the terms of their trust. A gift in a trust becomes irrevocable upon their parent’s death (or the creator of the trust or otherwise known as a “Trust Maker.”

A spendthrift provision helps a beneficiary against the following creditors:

• A divorce or dissolution of marriage action brought by a spouse of a beneficiary that is inheriting under the terms of a trust

• A creditor such as a credit creditor, a bank (for breach of a promissory note or mortgage); and/or a judgment creditor from a business lawsuit, a car accident and/or a civil or criminal judgment

OSWEGO ESTATE PLANNING ATTORNEYS FOR YOUR FAMILY

Peace of Mind Asset Protection, LLC is a boutique estate planning and asset protection law firm specializing in providing peace of mind for families and wealth preservation. Unlike most law firms, our law firm concentrates in wealth preservation and wealth accumulation law. Call us today to protect your beneficiaries and provide a smooth and peaceful transition of your assets upon a death or incapacity. Our law firm has offices in Naperville and Yorkville, Illinois.