It’s Business, And It’s Personal

When and how can spendthrift trusts benefit an estate plan?

On Behalf of | May 28, 2021 | Estate Planning |

Architects design with the principle “Form follows function;” creators of a trust could ask whether “Structure follows purpose.” A trust’s purpose, meaning the grantor’s intent and the needs of all identified beneficiaries, will determine its structure, or type.

Unlike buildings, however, people can alter their behavior or encounter unforeseen financial or medical situations. An estate plan that includes a spendthrift trust may prevent the worst outcome: a depleted trust unable to provide the beneficiary with benefits.

What does a spendthrift trust accomplish?

A spendthrift trust differs most significantly from other trusts regarding distributions. Beneficiaries, subject to the terms of the trust, receive distributions in allotments over a period time.

The beneficiary has no right to the money and creditors can attach only the money received. Grantors could avail themselves of such a clause, especially to insulate financially unsophisticated and wastrel beneficiaries from themselves and their creditors.

Federal and state exceptions apply to spendthrift trusts in North Carolina

North Carolina’s spendthrift statute insulates beneficiaries, yet it contains common-sense and important exceptions grantors should consider. Debt incurred from child and spousal support and other legal obligations remain attachable. In addition, trust settlors enjoy no protection. In practical terms, these exceptions extend a creditor’s interest extend to future distributions.

Federal tax liens, though not relevant in every case, remain an exception whose consequences may arise long years after trust formation. At least one court decision and an Internal Revenue Service memorandum have held that spendthrift trusts create a legal interest in property. Thus, the federal government can determine tax consequences. Even the most prescient grantor lacks the ability to protect a beneficiary with delinquent taxes.

Decanting permits spendthrift trust modification and the creation of a new trust

A separate “decanting” statute removes one significant characteristic of an irrevocable living trust ─ the very limited ability to modify or amend. Though not unrestricted, the right to decant permits an authorized fiduciary to either modify the terms of the first trust or distribute its property to a second trust.

Settlors who deem unforeseen circumstances have altered the original purpose of the trust may find an attorney familiar with spendthrift trusts helpful.