Estate planning is an important part of securing your future and the future of your beneficiaries. Planning helps protect your assets and your family. There are several tools and services that our experienced attorneys will discuss with you to help plan for the unexpected and protect your assets if you become incapacitated or after you pass away. One of those tools is a spendthrift trust.
What Is a Spendthrift Trust?
A spendthrift trust is a way to protect assets for your beneficiary. There is a third person (a trustee or fiduciary) who manages the assets and dispenses them in accordance with your wishes.
In 2012, the legislature established the qualified self-settled spendthrift trust (QSSST) to allow asset protection through an irrevocable trust. The person who establishes the trust is called the settlor. The settlor can retain beneficial interest in the assets, which are then not subject to seizure by creditors.
This is a type of asset protection trust that has a clause preventing the beneficiary from spending down the assets or borrowing unwisely against the assets. In essence, it protects the beneficiary from making unwise financial decisions and protects the assets from most creditors.
The assets are in spendthrift trusts are also protected from the settlor’s creditors. This is helpful for people who are in businesses with a high rate of lawsuits, such as building contractors or doctors.
However, in the Commonwealth of Virginia, there is a five-year transition period. During this time, creditors can file a claim against the assets transferred into a QSSST. Once that five-year period is over, creditors may not be able to touch the assets unless they can prove that the trust was created to defraud creditors.
The Role of the Trustee
In a spendthrift trust, the beneficiary does not get control over the assets. Instead, a trustee makes direct payments or dispenses cash payments like an allowance. This is an option for settlors who have a beneficiary they worry could squander or waste their inheritance.
A QSSST can also be used to protect assets from a beneficiary’s spouse if the settlor anticipates a divorce. Beneficiaries who have gambling problems, mental illness, or substance abuse issues can also benefit from this protection.
What Should You Consider?
Several requirements must be met in order for the trust to qualify as a QSSST. If these requirements are not met, the trust will not protect the assets from a creditor. The statute is complex, so it’s crucial you work with an experienced estate planning attorney.
An estate planning attorney can help ensure that the trust you create meets the requirements. These include that the trust must be irrevocable, created during the settlor’s lifetime, and names at least one beneficiary other than the settlor.
The trust must also have a qualified independent trustee and have some Virginia property included in the assets. Because the trust is irrevocable, the settlor cannot retain any right to veto a distribution from the trust. While this is one way to protect your assets, it can fail if there is misconduct on the part of the trustee or there are exempt creditors who can access the funds through the court.
Contact Taylor, Taylor & Taylor, Inc. Today to Protect Your Beneficiaries
If you want to discuss your estate plan and are concerned that a beneficiary will not be responsible with their inheritance, a spendthrift trust may be your answer. Contact Taylor, Taylor & Taylor, Inc. today to discuss this option and discover how estate planning can protect your assets and your family’s future. Contact our office today at 804-266-9619 for your initial confidential consultation.