Sometimes, the most difficult part of creating an estate plan is not deciding who to include as beneficiaries but deciding how to gift assets to those beneficiaries. For example, you may be reluctant to pass down assets directly to a beneficiary because that individual cannot be trusted to manage his/her own money for one reason or another. If you find yourself in that position, a spendthrift trust may be the solution. For those who are unfamiliar with the concept, an Indianapolis estate planning attorney at Frank & Kraft explains how a spendthrift trust works.
The Spendthrift Beneficiary
Do you have an adult child, or other beneficiary, who qualifies as a spendthrift? This is someone who never seems to be able to handle money and/or who spends way more money than he/she should. Most families have one. Sometimes the lack of financial acumen has an actual cause, such as an addiction problem or a mental illness. For other spendthrifts, there is no obvious reason why they don’t handle money well; however, it is a universally agreed upon fact that money management is not their strong suit. Understandably, the thought of handing a spendthrift beneficiary a sizeable inheritance likely makes you nervous. Fortunately, there is an estate planning tool that can help.
How Does a Spendthrift Trust Work?
One of the many benefits to using a trust instead of a Will to distribute an inheritance is the ability to retain a certain amount of control over how that inheritance is used. A spendthrift trust is a specialized type of trust that is aimed at preventing the beneficiaries of the trust from squandering their inheritance. Very specific language must be used to create a spendthrift clause; however, when drafted properly, a spendthrift clause will prevent a beneficiary from spending the trust funds frivolously as well as prevent borrowing against those funds or encumbering the funds in any way. A spendthrift clause can also prevent creditors of the beneficiary from accessing the trust funds to pay debts of the beneficiary. In short, a spendthrift trust wraps the trust assets in a layer of protection against both outside claims to the assets and against the beneficiary’s inability to handle money.
Indiana Law and Spendthrift Provisions
Because state laws govern most aspects of trust creation and trust administration, we must look to California law to determine if a spendthrift provision within a trust agreement is enforceable. In 2019 Indiana made important changes to its trust laws. IN Code § 30-4-8-7 (2019) now provides as follows:
Sec. 7. (a) Except as provided in section 8 of this chapter, no cause of action of any kind, including a cause of action to enforce a judgment, may be brought for:
(1) an attachment or other provisional remedy against property that is the subject of a qualified disposition to a legacy trust; or
(2) the avoidance of a qualified disposition to a legacy trust.
The protections provided to a qualified disposition by this subsection apply notwithstanding any law to the contrary set forth outside this chapter.
(b) If a court declines to apply Indiana law in determining the effect of a spendthrift provision in a legacy trust in an action brought against a legacy trust, the trustee of the legacy trust shall immediately resign and, without further order of any court, cease to be the trustee of the legacy trust. When a trustee resigns under this section, the trustee has the power only to convey the trust property to a successor trustee appointed under this section. A successor trustee shall succeed the resigning trustee in accordance with the terms of the legacy trust. If the trust does not provide for a successor trustee and the trust would otherwise be without a trustee, any beneficiary of the trust may petition an Indiana court to appoint a successor trustee. The Indiana court receiving the petition shall appoint a successor trustee to serve in accordance with the terms and conditions that the court determines are consistent with the purposes of the trust and this chapter.
(c) A legacy trust and its property are protected under this section regardless of whether or not the transferor:
(1) serves as an investment adviser under section 12 of this chapter; or
(2) retains a power described in section 13 of this chapter.
(d) To the maximum extent permitted by the United States Constitution and the Indiana Constitution, a court of this state shall exercise jurisdiction over a legacy trust or a qualified disposition and shall adjudicate a case or controversy brought before the court regarding, arising out of, or related to a legacy trust or a qualified disposition if that case or controversy is otherwise within the subject matter jurisdiction of the court. Subject to the United States Constitution and the Indiana Constitution, a court of this state shall not dismiss or otherwise decline to adjudicate a case or controversy described in this subsection on the grounds that a court of another jurisdiction has acquired or may acquire proper jurisdiction over, or may provide proper venue for, the case or controversy or the parties to the case or controversy. Nothing in this subsection shall be construed to do either of the following:
(1) Prohibit a transfer or other reassignment of a case or controversy from one court of this state to another court of this state.
(2) Expand or limit the subject matter jurisdiction of a court of this state.
Contact Indianapolis Trust Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding a spendthrift trust, contact the experienced Indianapolis trust attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.