Spendthrift Trusts

In plain English without the legalese, a spendthrift trust allows you to leave money to a loved one with supervision so that they don’t spend it all frivolously and so that it goes to their needs rather then their “wants or habits”.

A spendthrift trust’s purpose is to regulate a beneficiary’s access to the funds or assets held within the trust account. It’s an important tool that can help guarantee your beneficiaries are taken care of, while simultaneously ensuring your assets are distributed according to your specific wishes.

Spendthrift trusts are usually set out in the Grantor’s Will and become effective upon the Grantor’s death. The trust can be revocable (the grantor can change his mind) or irrevocable (the grantor cannot change his mind). Spendthrift trusts operate a bit differently than other trusts.

A spendthrift trust includes what’s called a spendthrift clause or spendthrift provision. This caveat permanently designates the trust itself as the sole owner of the assets held within it, rather than transferring ownership to your beneficiary upon your passing.

The beneficiary will still receive the assets, however — they’re released from the trust over time, on a schedule you (the grantor) and your trustee determine when you create the trust. This incremental release of assets can help protect your estate from any irresponsible spending habits while still providing your loved ones with the inheritance you’ve set aside for them.

The main benefit of a spendthrift trust is that it can protect your assets from a potentially unreliable beneficiary. It safeguards your estate without taking the beneficiary’s inheritance from them. 

In addition to asset protection, spendthrift trusts can help protect your beneficiaries from creditors. Because the assets included in a spendthrift trust are owned by the trust and managed by the trustee, they aren’t considered a part of your beneficiary’s assets.

Let’s say you plan to leave a $100,000 estate to your beneficiary, but you want to ensure the money is handled responsibly. By using a spendthrift trust, you can still leave that money to your beneficiary while portioning it out to encourage healthy financial habits. 

You schedule releases of money at a cadence that feels manageable to you and your beneficiary and in this way, you can guarantee that money will go to your beneficiaries in more manageable chunks, as opposed to distributing the entire $100,000 at once.

Setting up a spendthrift trust is similar to setting up any type of trust, but it includes a few extra steps. The biggest difference is that you’ll have to set the terms for how you’d like to release your assets. These terms can be as complicated or as simple as you’d like. 

 I’m happy to answer questions about creating a spendthrift trust as a part of your estate planning if you have a loved one whom you feel could use a little more attention in reagrds to their inheritance from you. You can schedule a complimentary consultation here.

Owning Real Estate: LLC vs. Trust?

Owning Real Estate: LLC vs. Trust?

As with most other financial and tax planning strategies, the choice between holding rental property in an LLC or a trust depends on an investor’s unique situations, needs, and goals. 

An LLC for rental property may be a good way to protect other business and personal assets from creditor claims and to raise funds for group investing. By comparison, a real estate trust may be a good vehicle for investors seeking to avoid probate, reduce estate taxes, and pass real property to another family member. 

Both an LLC and a trust are pass-through entities for tax purposes. They will collect rental income and pay expenses, with any income or losses passed through to the individual members or owners and reported on personal tax returns. Investors also may defer capital gains when rental property held by an LLC or a trust is sold and a replacement property is purchased within a specific period of time.

See my preivous posts on LLC For Rental Property and Real Estate Trust for more information. Please reach out if you’d like to discuss these entities for your asset protection needs.

Demystifying Trusts

Planning our estate with Wills and Trusts.

I can’t tell you how many times I get calls from people who want to create a trust of some kind as a part of their estate plan. There are many types of trusts and they all serve different purposes. I have created a summary of the most common types of trusts and what they are used for as a basic guideline to help dispel some of the myths around “trusts” and how they are used. There are many different asset protection tools available, including LLCs and family partnerships and so trusts are an important vehicle but not the only way to protect assets. As an estate planning tool, trusts are an important planning technique but not always either necessary or advisable. If you are curious about trusts and how they are used, I hope the summary below gives you some helpful information.

First, there are revocable trusts and irrevocable trust. Revocable living trusts are generally used as part of an overall estate plan and are important planning tools in Colorado when a client has assets in multiple states or a very complex asset structure, has an imminent disability that would require a successor trustee to be able to step in seamlessly, or has a need for privacy. While probate avoidance is important in some jurisdictions, Colorado has an informal and relatively simple probate process that can make the expense of trust set up contraindicative for simple estates. Revocable living trusts do not shelter assets from the creditors of the settlor and become irrevocable upon the death of the settlor.

An irrevocable trust cannot be modified or revoked after it is created. Examples of these are Irrevocable Life Insurance Trusts (ILIT) or Asset Protection Trusts, which can be set up in jurisdictions such as Nevada or the Cook Islands that have trust protection laws. ILITs are generally used as an estate planning technique for those who find themselves in the position of having taxable estates ($5.43 million in 2015) and Asset Protection Trusts are used to make sure that future creditors can never access the Trust to satisfy a judgment against the settlor.

Charitable Remainder Trusts are set up to benefit a nonprofit organization.   These are used as an estate planning technique and can help avoid the estate being taxed and gift tax implications. The settlor receives benefits during his or her life and also receives the intangible benefit of being recognized by the charity beneficiary during his or her life.

Special Needs Trusts are set up for people who are disabled and receiving government benefits. The disabled beneficiary cannot control the amount or frequency of the trust distributions and cannot revoke the trust. Parents of a disabled child can establish a special needs trust as part of their estate plan and not worry that their child will be prevented form receiving necessary benefits when they are not their to care for their child.

There are many other types of trusts, including Spend Thrift Trusts which are created to protect a beneficiaries’ interests from creditors, Tax By-Pass Trusts, Totten Trusts, etc. If you are curious about whether a trust might be an important tool to manage your assets, I would be happy to discuss the various types and how they might or might not be applicable to your situation.