Chipman Mazzucco Emerson LLC

Protecting assets with a spendthrift trust

A trust is an appealing estate planning tool for individuals in Connecticut who want to pass assets along to children and other descendants. A trust fund can be set up in a way that carefully controls disbursements of money and other assets. The exact way disbursements are handled is largely dependent on preferences and a trust creator's (grantor's) knowledge of how their designated heirs are likely to handle such assets.

One option is a spendthrift trust. This type of trust is overseen by a trustee, which can be an individual or a corporate trustee. With this trust, an asset management company is typically hired to invest the trust's money after it's made irrevocable (when the grantor passes away). The designated beneficiary is not permitted to spend the trust's money until disbursements are actually received.

A trust agreement also gives the trustee the authority to decide what payments are considered necessary. The beneficiary of a spendthrift trust is also prohibited from pledging the trust assets as collateral. For instance, if a beneficiary wishes to purchase a $1 million home but their distributions from a $5 million trust are $200,000, the financial institution would only be able to collect the $200,000 if payments aren't kept up. What this setup does is protect the trust's principal by allowing it to safely remain in place to generate interest, dividends, and other additional funds. However, most states prohibit grantors from naming themselves as beneficiaries to enjoy this creditor protection.

The creation of a spendthrift trust is similar to what's done with any type of trust, except that it contains a spendthrift provision. An estate planning attorney can help an individual interested in this type of trust by ensuring provisions that apply to the beneficiary are clearly spelled out. A lawyer also typically advises a client to put some thought into choosing the designated trustee.

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