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Spendthrift Trusts Can Protect Your Assets

Historically, trusts have been created with one major goal in mind — to protect assets in a trust while still allowing the assets in the trust to be used by the trust beneficiaries

Example: A Grandfather might desire to give his favorite Grandson a gift of $75,000. However, the grandfather may be concerned that his Grandson’s new start-up business might fail and result in the Grandson’s high debts to his creditors. Likewise, Grandfather might want to give his 18-year-old Grandson the same gift of $75,000.00 but recognizes that Grandson has not yet become responsible enough to manage that kind of money for himself.

By placing either of the gifts described above for the Grandsons in a trust, the Grandfather can provide a benefit to his Grandsons while protecting the assets from his potential creditors or from either of the Grandsons’ immaturity or inability to make wise decisions.

Texas law recognizes spendthrift provisions in trusts. These are provisions created by the Grantor when he initially sets up the trust. These provisions are incorporated into most trusts and direct that the trust assets cannot be used to pay creditors of the trust’s beneficiary. By including a spendthrift provision into a trust agreement, the trust assets are then protected.

The inclusion of the Spendthrift provisions results in such trusts being referred to as “Spendthrift Trusts.”

For the Spendthrift provisions to remain effective, the Trust provisions must require the Trustee to adhere to an “ascertainable standard” when making distributions from the Trust. This standard means that the trustee cannot just make distributions without regard to any limitations. Rather, most spendthrift trusts typically provide that the Trustee can make distributions for “health, support, education, or maintenance” of the beneficiaries of the Trust. By including these restrictions, the Trust contains an ascertainable standard or limitation that guides the trustee in making decisions. Numerous Court cases in Texas have upheld the ascertainable standard requirements. Still, those same cases assure us that the standard’s inclusion will uphold the spendthrift nature of the Trust.

When considering various estate planning options, many people consider the creation of trusts for specific purposes. When discussing these options with your estate planning lawyer, you should always inquire whether or not a contemplated trust will include the spendthrift provisions. Only in minimal circumstances would you want to eliminate these provisions. Conversely, in most cases, you will want to include the spendthrift provisions and understand what is required to ensure that they are upheld. The lawyers at Ford + Bergner LLP can advise you on each of these matters. Call 713-352-0937 for more information.