This is an important and common question. You can spend your lifetime scrimping, saving, and sheltering your wealth, and leave your fortune to your kids who promptly spend or lose it. So you must also safeguard your beneficiary’s inheritance. For this you’ll need a spendthrift trust. The spendthrift trust will protect your beneficiary’s interest in the trust from his or her judgment creditors and ex-spouses, since there is an anti-alienation or spendthrift clause in the trust to protect the trust assets from a beneficiary’s creditors. The antialienation provision prohibits the trustee from distributing trust assets to anyone other than the beneficiary. This would include the beneficiary’s creditors. The spendthrift and antialienation provisions expressly preclude anyone whose interest is adverse to the beneficiary (a creditor, ex-spouse, etc.) from claiming the beneficiary’s share of the trust principal or income. However, these provisions don’t always give a beneficiary absolute protection. There are limitations. For example, several states don’t recognize or enforce spendthrift provisions. Nor do spendthrift provisions always fully protect a beneficiary. Nor does it shelter income distributions once paid to the beneficiary.
Equally important, in our view, is to give the trustee the discretion to withhold distributions to the beneficiary. For example, if your trust provides a beneficiary trust distribution at age 25, will those distributions be safe if the beneficiary has a judgment creditor or pending divorce when the beneficiary reaches 25? A discretionary provision allows the trustee to withhold income and principal distributions that would otherwise be paid to the beneficiary if the trustee believes the funds would be lost to the beneficiary’s creditors. A discretionary clause also prevents a beneficiary from wasting trust assets; an especially important consideration when your children are the beneficiaries and you want your trustee to control distributions to your children. If your child isn’t a spendthrift, is your child’s spouse? You see the point. You also want to preserve the trust principal for your child in the event your child dies or divorces and similarly want to protect gifts you place in trust for your grandchildren or great-grandchildren.
We also commonly add sprinkling provisions to trusts that are expected to last ten or more years and where each beneficiary’s future income or tax situation is uncertain. This sprinkling provision lets the trustee modify trust distributions to determine what, and when, each beneficiary receives their distributions. But you – as the grantor – would set the criteria for the trustee’s distributions and specify minimum income distributions when the beneficiary is your spouse or dependent.