Monday, August 8, 2011

Protecting your money from yourself

A person is a spendthrift when they spend money recklessly or wastefully. A spendthrift trust is an irrevocable trust established on behalf of a beneficiary that gives full control to an independent trustee who will, in his sole discretion, determine when the beneficiary will receive distributions. It's done this way to protect a spendthrift beneficiary from recklessly or wastefully using the trust assets.

Two reasons why it's so desirable are 1) it provides protection of the trust assets from creditors of the trust creator (the grantor) because the assets are no longer in the grantor's possession. A creditor of a person can't reach what that person doesn't own. And 2) the beneficiary is prevented from spending the trust assets set aside for the beneficiary's benefit without the approval of the trustee. Unless the trustee actually makes a distribution, the beneficiary doesn't have a claim on the trust property.

This type of trust is most commonly used all over the country by parents who want asset protection and want to ensure their children use the trust assets wisely, taking advantage of the two benefits listed above. A unique use in Nevada, and another handful of states that allow self-settled spendthrift trusts, is for the grantor to place assets in the trust to protect them from himself or herself.

Nevada allows the grantor of the trust, the person who contributed the trust assets, to also be a beneficiary and trustee. I've had a couple cases recently where my client knew that if he had the cash, he would spend it unwisely. In both cases these clients had a lot to lose. They each wanted the safeguard of asset protection and the limitation of access to the cash in the trust. In both cases, I named the client as grantor and beneficiary. In one case we appointed a committee of family members as co-trustees and in the other, a bank as trustee. In both, we designed the trust with specific guidelines regarding the payment of living expenses, medical expenses, education and other related needs. We also set up an allowance, again on a discretionary basis, to be distributed to the grantor-beneficiary. The result was a limitation on the availability of funds to the literal spendthrift.

It's difficult to find an institution whether it be a bank or a life insurer or otherwise, who will create a product that doesn't provide access to deposited funds. Most likely they will discourage withdrawals from accounts like CDs or permanent life insurance policies with cash penalties, but access is still available. This is the best solution I'm aware of that will provide full asset protection and limitation of distributions to the original owner of the funds. Of course, it can't happen without the cooperation of the grantor, but when it works, the benefit is immense.

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