For many people, a primary motivation for creating their estate plan is so their loved ones are provided for in their absence. That said, simply gifting a beneficiary money, or other assets, isn’t always an ideal plan. If your beneficiary is a spendthrift, you probably will want someone to control how the assets you gift are used. An Oklahoma City estate planning attorney at Parman & Easterday explains how a spendthrift trust may help you maintain the control you need over the assets you gift.
What Is a Spendthrift Beneficiary?
A “spendthrift” is someone who doesn’t handle money well or who spends every penny received. These spendthrift tendencies may be the result of an addiction problem, mental illness, or undue influence from others. Or it may be that there isn’t any obvious explanation for why the individual cannot seem to handle money. Either way, handing a spendthrift beneficiary a sizable inheritance outright, without any control over what happens to the inheritance, may be a cause for concern. The good news is that a spendthrift trust can help.
What Is a Trust Agreement?
At its most basic, a trust is a relationship in which property is held by one party for the benefit of another. The terms and provisions of a trust are reduced to writing in a document referred to as a “trust agreement.” Trusts are broadly divided into living trusts and testamentary trusts, the last of which only become effective at the time of the Settlors’ deaths by a provision in the Settlors’ Wills. Living trusts are created during lifetime and may be revocable or irrevocable.
What Is a Spendthrift Trust and How Can It Help?
A significant benefit to using a trust instead of a Will to distribute an inheritance is the ability to retain control over how that inheritance is used. A spendthrift trust is a specialized type of trust that prevents the beneficiaries of the trust from squandering their inheritance. Very specific language must be used to create the spendthrift clauses. If drafted properly, a spendthrift clause will prevent a beneficiary from spending the trust funds frivolously, borrowing against those funds, or encumbering the funds in any way. A spendthrift clause can also prevent creditors of the beneficiary from accessing the trust funds to pay debts of the beneficiary. In short, a spendthrift trust wraps the trust assets in a layer of protection against both outside claims to the assets and against the beneficiary’s inability to handle money.
Are There Limits to the Protection Offered by a Spendthrift Trust?
State law governs most aspects of a trust agreement, including the validity of a spendthrift provision within the trust agreement. While most states recognize and enforce spendthrift trusts, the protection offered frequently has limits. In Oklahoma, 60 O.S. Section 175.25 governs spendthrift trusts, placing the following limits on the protection offered by one:
- Notwithstanding a provision in the terms of a trust restraining the alienation of the interest of a beneficiary, such interest shall be entitled to be reached in the satisfaction of claims to the following extent:
- All income due or to accrue in the future to the beneficiary shall be subject to enforceable claims under the laws of this state for:
- support of a husband, wife, or child of the beneficiary,
- necessary services rendered or necessary supplies furnished to the beneficiary, or
- a judgment based on any such claim under subparagraph a or b;
In addition, the statute states that “all income due or to accrue in the future to the beneficiary in excess of Twenty-five Thousand Dollars ($25,000.00) per calendar year shall be subject to garnishment by creditors of the beneficiary and shall be fully alienable by the beneficiary.”
In other words, the principal held by the trust remain out of the reach of all creditors; however, income due to a beneficiary can be reached to pay child or spousal support as well as by a creditor who has provided necessary services or supplies. In addition, any income over $25,000 per year can be reached by any creditor and may be encumbered by the beneficiary.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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