Up until 2017, estate planning attorneys felt that “Spendthrift Trusts” were among the most reliable methods of asset protection for a child’s inheritance. That may have changed after the U.S. Supreme Court’s 2017 decision U.S. v. Harris.


A spendthrift trust is a trust created by one person for another person’s benefit (the “beneficiary”), but designed in such a way that the beneficiary has no control over the money and discretion is given to the Trustee over how, when or if distributions should be made for the beneficiary’s “health, education, maintenance and support”. The idea is that if the beneficiary had no control over the money, and no right to demand a distribution, then the beneficiary’s creditors, ex-spouses or others could not go after the spendthrift trust. That way a child’s inheritance is protected from creditors and predators, but is still available to support that child if they need it, in your Trustee’s discretion.


The U.S. Supreme Court in U.S. v. Harris disagreed, holding that since Trustees are bound by fiduciary duties to “support” the beneficiary of a spendthrift trust, that creates enough of a beneficiary expectation in receiving money from the trust to allow a creditor to go after the trust money. The decision addressed California law on a beneficiary’s property rights to a discretionary trust, so results may vary from state to state and we can expect to see this issue addressed again and again in the coming years. The solution to this may lie in more careful drafting of a spendthrift trust. Some examples might be to eliminate any reference to a purpose of the trust being to “support” a particular beneficiary, and leave it as a purely discretionary trust. This takes a step towards eliminating any potential property interest the beneficiary may have in the trust (for example, how much of a property interest do you children have in your personal funds right now? Yet, you retain the “discretion” to give them money whenever you wish, right?). Another way around U.S. v. Harris is to create a class of beneficiaries, such as your child and a charity. Such a provision again takes a step towards eliminating a beneficiary’s expectation of receiving anything from the trust, because 100% of the trust could be given to the charity. Finally, the trust could expressly prohibit distributions to the beneficiary directly, and only allow distributions to third parties for the beneficiary’s benefit (like paying rent, health insurance, etc.). This is particularly useful when a beneficiary faces issues like substance abuse or gambling problems, as it prevents them from being given money under any circumstances, even if they have no creditors.


Since this is an evolving area of law, spendthrift trusts should contain “Trust Protector” provisions, which allow a Trust Protector to modify the terms of the trust even after it is irrevocable, to accomplish your stated intentions in the face of changing laws.


Trusts remain one of the most flexible tools in planning out your estate, but being aware of the latest changes in the law is important. Interested in talking about your estate plan? Maybe you have never even thought about it, or you believe you don’t have enough of an “estate” to worry about it? Everyone should have an estate plan, so contact the Gegan Law Office and schedule a time to talk about how you can use an estate plan to protect and provide for your family.

 

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