We’ve all heard of trusts. After all, they are one of the most common estate planning tools. Some people establish trusts for asset protection. Others need to provide for a loved one with a special needs trust. Two trusts that are similar, but not the same are the spendthrift trust and the discretionary trust. Though similar, they do have significant differences. Understanding those differences is important if you need to choose between them.
What is a Trust?
One person may decide they need a trust. They then sign a trust document, establishing the trust as the grantor or settlor. The trust document names a trustee who will manage the trust assets for the benefit of the beneficiary or beneficiaries. There’s always a reason for creating the trust. The grantor may even be protecting the trust for a beneficiary who has creditor claims or judgments against them. Spendthrift and discretionary trusts may help.
The Spendthrift Trust.
According to Arizona law, a spendthrift provision in a trust prevents the voluntary and involuntary transfer of a beneficiary’s interest. With a spendthrift trust, beneficiaries are not able to transfer their inheritance interest to anyone. In addition, creditors are not able to take any of the trust funds.
Certain types of creditors are exempt and may still go after spendthrift trust assets:
- Children, a spouse or a former spouse of the beneficiary who are owed support under an order or judgment;
- Judgment creditors who has provided services for the protection of the beneficiary’s interest in the trust;
- State and federal governments, for some debts.
If you’re thinking of establishing a spendthrift trust, note that once funds are disbursed, they are no longer protected from seizure by creditors.
The trustee decides how and when the trust disbursements will be made from a discretionary trust. Trustees may withhold payments to the beneficiary in some circumstances. For example, if the beneficiary has a track record of reckless financial behavior, creditor claims, and judgments. In addition, the trustee may directly pay for a beneficiary’s expenses, instead of giving the money to the beneficiary.
The Most Significant Differences.
The trust assets are controlled very differently. With a spendthrift trust, the trustee might be required to make disbursements in compliance with a trust document. Under a discretionary trust, however, the trustee has more control over who gets the funds. A discretionary trust typically offers greater asset protection to its beneficiaries.
With either trust, though, once the money is disbursed, it’s fair game. To prevent seizure of trust disbursements, the trustee of a discretionary trust can pay expenses, like tuition or a mortgage, bypassing the beneficiary completely. Since the beneficiary never took possession of the money, it can’t be claimed by creditors.
Learn More About Your Trust Options.
Spendthrift and discretionary trusts are not for everyone. You need an attorney who knows the differences and whether they will achieve your estate planning goals.
We know how to analyze your current situation and help you make thoughtful decisions about your estate. Call us at (480) 418-8448 to set up an appointment. Although located in Chandler, we also work with clients in the surrounding communities like Sun Lakes, Gilbert, Mesa, Phoenix, Scottsdale, and Tempe.