You may be honest with yourself in acknowledging that your desired beneficiary has trouble managing finances well. However, this does not mean you cannot leave behind an inheritance for them; you just have to do so carefully. For this, we would recommend establishing either a spendthrift or a discretionary trust. Without further ado, please follow along to find out the differences between the two and how a proficient Putnam County trusts attorney at the Law Office of Andres D. Gil, PLLC, can help you choose the most appropriate one for your estate plan and your beneficiary’s best interests.

What is the difference between a spendthrift and a discretionary trust?

Both spendthrift and discretionary trusts closely control how assets are distributed to the named beneficiary. But the key difference is how and who initiates this control.

For one, a spendthrift trust allows you, as the grantor, to direct your appointed trustee on managing and transferring the assets to your beneficiary upon your unfortunate passing. Namely, you may order them to distribute these funds in small increments over a long period. Or, you may instruct them to administer these funds only when your beneficiary needs to pay off necessary expenses, such as for basic needs and living expenses.

On the other hand, a discretionary trust gives your trustee more control over how, when, and in what manner these assets are given to your beneficiary. As the name suggests, your trustee may use their “discretion” and withhold these funds indefinitely should your beneficiary unexpectedly exhibit poor spending habits or otherwise. Arguably, a discretionary trust may work better to protect these funds, as you may only be able to predict and prepare for so much with the spendthrift trust made during your lifetime.

What protections does a spendthrift trust not offer?

One of the protection mechanisms offered by both spendthrift and discretionary trusts is that they shield from the collection activities of your beneficiary’s creditors. This is because these trusts are considered separate legal entities from your beneficiary. However, it is worth mentioning that certain creditors may still be granted access to a spendthrift trust, and they read as follows:

  • Your beneficiary’s child or former spouse who is owed child support or alimony, respectively.
  • A state or federal government entity looking to collect certain debts (i.e., federal tax liens).
  • A judgment creditor who provided services for the protection of your beneficiary’s interest in the trust.

That said, both trust types cannot control what happens to these funds once they are distributed to your beneficiary. However, a discretionary trust may offer a method for protecting from creditor seizures that a spendthrift trust cannot. That is, the trustee of your discretionary trust may use these funds to pay off your beneficiary’s debts owed to their creditors (i.e., mortgage payment, car payment, tuition payment, etc). This is instead of distributing them to your beneficiary and leaving the chance for them to make a poor spending decision.

To give yourself enough time to develop a solid estate plan, please be sure to get in touch with a talented estate planning attorney in Putnam County at the Law Office of Andres D. Gil, PLLC, as soon as possible. We look forward to hearing from you.