Discretionary or Spendthrift – What’s the Diff?

Posted on : March 29, 2018, By:  George Dillon

Trusts have become one our most common estate planning tools. Why? Well, you might want to establish and fund a trust for asset protection, wealth management, or providing for a loved one who has special needs. Some trusts even protect their own beneficiaries. Spendthrift and discretionary trusts are similar, and both do offer protection for beneficiaries. But there are significant differences. If you need a trust, will you know which one to choose?

Trusts 101

Trust document are signed by the person creating the trust (the grantor or settlor). This document names a trustee, and sometimes co-trustees or successor trustees, who will manage the trust assets for one or more beneficiaries.

There’s always a reason to create a trust. Sometimes the settlor wants to protect trust assets for a beneficiary who is vulnerable to creditor claims or judgments. That’s where spendthrift and discretionary trusts are handy.

The Self-Settled Spendthrift Trust

A spendthrift trust does what the name implies – protects the trust from the beneficiary’s spendthrift ways. Under Virginia law, though, a spendthrift trust has to meet the following criteria:

  • The grantor cannot become insolvent by transferring all assets to the trust.
  • The trust cannot be created simply to avoid creditors.
  • There must be an independent, qualified trustee that lives or is licensed in Virginia.
  • It must be an irrevocable trust, meaning it’s difficult or impossible for the settlor to change the trust.
  • The settlor cannot be the only beneficiary of the trust.

With a spendthrift trust, beneficiaries cannot transfer their inheritance interest to a third party. Creditors are generally prevented from taking trust assets. A court, however, may allow a creditor to take present or future distributions to the beneficiary.

There are exceptions to the spendthrift provisions of the trust. Some creditors may still attach spendthrift trust assets:

  • A spouse, former spouse, or child of the beneficiary owed support under a court order;
  • Any claimant with a court order attaching future or present distributions to a beneficiary;
  • State, local, and federal governments.

The Discretionary Trust.

Unlike the spendthrift trust, the trustee has the discretion to decide how and when to make trust disbursements. When the beneficiary has exhibited reckless financial behavior, or if creditors are knocking at the door, the trustee may withhold payments to a beneficiary. Instead of making direct distributions, the trustee may pay for a beneficiary’s expenses. The beneficiary still receives benefits from the trust, but the distributions are typically safe from claims.

Significant Differences

Control is probably the most significant difference between spendthrift and discretionary trusts. With a spendthrift trust, the trustee might be required to make disbursements to comply with the trust document. However, with discretionary trusts, the trustee has at least some control over the trust funds. If you’re looking for greater asset protection for the beneficiaries, then discretionary trusts may be the way to go.

Remember that with both trusts, once the money is given directly to the beneficiary, it’s fair game for creditors.

Call Today.

Contact the attorneys at the Dillon Law Group to discuss your estate plan and whether you need to set up a trust. Please call us at 757-962-4796 to set up an appointment or contact us online by using our convenient Contact Form. We assist clients in Virginia Beach, Newport News, and surrounding communities.

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