Spendthrift Trusts vs. Discretionary Trusts

Trusts are among the most common and useful estate planning tools available, whether your goal is asset protection, caring for loved ones, or both. A key reason to establish trusts whether spendthrift trusts vs. discretionary trusts is to protect your beneficiaries from judgments by creditors. After all, you have worked to accumulate the assets you put into the trust, and you want those assets to go to your beneficiaries, not their creditors.

If you are worried about your beneficiaries losing their assets, or you do not trust a beneficiary to use the assets wisely, you should consider establishing a spendthrift or discretionary trust. These trusts give trustees greater control over how the assets can be disbursed and offer beneficiaries greater protection from creditors. The North Carolina estate planning lawyers at Mullen Holland & Cooper have over half a century of experience, and we can help you establish the right trust for your needs between spendthrift trusts vs. discretionary trusts. Keep reading to learn more.

What Is a Spendthrift Trust?

A spendthrift trust is a type of trust in which the beneficiary cannot sell or give away their interest in the trust. The idea is that by blocking the beneficiary from doing this, the beneficiary is protected from their own potentially reckless spending and judgments from creditors. While the trustee may be required to disburse assets to the beneficiary according to the terms of the trust, these assets cannot be claimed by creditors until the beneficiary receives them. This provision gives the beneficiary a certain amount of protection from creditors.

What is a Discretionary Trust?

In a discretionary trust, the trustee maintains full control over how and when any payments are made to beneficiaries. Having the trustee control how the assets are disbursed can protect beneficiaries who may otherwise inappropriately spend these assets. Furthermore, the trustee can pay for the beneficiaries’ expenses directly, and since the assets are still under the control of the trustee, the trust is protected from any judgments against the beneficiaries.

Which Type of Trust is Right for You?

There are always pros and cons to different types of trusts, and which one is right for you depends on your specific needs.

Both spendthrift trusts and discretionary trusts offer beneficiaries a certain amount of protection from creditors. However, discretionary trusts do a better job of protecting beneficiaries from themselves. It’s one thing to guard a beneficiary’s interest in a trust, but if you do not believe a beneficiary can manage their financial affairs, you may be better off giving the trustee control through a discretionary trust.

One thing to keep in mind with both discretionary trusts and spendthrift trusts is that once any assets are disbursed to beneficiaries, those assets are fair game for creditors.  Furthermore, certain types of creditors can still go after the assets in a spendthrift trust, such as:

• A beneficiary’s spouse, former spouse, or child if they are owed child support
• Creditors who have provided services to protect a beneficiary’s interest in the trust
• State and federal governments, for certain debts

Have Questions About Spendthrift and Discretionary Trusts? Contact a North Carolina Estate Planning Lawyer Today

Estate planning matters can be complicated, and it’s essential to make sure any trust is drafted correctly to ensure it suits your needs and wishes. At Mullen Holland & Cooper, our extensive background as North Carolina trust lawyers makes us the ideal team to handle all your legal needs. Contact us  today for more information on how we can help you establish a trust.