Spendthrift Trusts – Keepers of the Gate

By: Attorney Katherine S. Charapich, Esq.

Published February 1, 2020

Wills and Trusts: Spendthrift Trusts – Keepers of the Gate

"Let each individual's reward be commensurate with the effort she has invested in the preparation for this exam." A beautiful prayer ushered by a respected law professor prior to administering a law school exam many years ago. Such a pleading seemingly appropriate for those hoping to perform well and thus given the keys to enter the halls of justice. Perhaps to a percentage of those who had not been diligent in their studies and were facing the beginning moments of the exam, a bit terrifying - not prepared and to now have invoked the authority of the Creator to weigh in . . . a little daunting.

Enter the concept of "adulting." One may have been diligent over the years and checked all of the "right" boxes - worked hard, served others, and most importantly she has maintained a foundation of faith. Even while being a good steward of her resources - both talents and assets, she is struggling in her later years.

Her circle of family and friends has dwindled, and her world seems silent on so many levels. She knows that accompanying her faith was never a promise that life would be easy; however, she holds fast to the Truth, "For with God nothing shall be impossible." Luke 1::37 (KJV)

This strong woman has been purposeful in preparing for her own care and the management of her assets for her care - putting in place a revocable trust, a last will and testament, a power of attorney, and an advance medical directive. She has funded her revocable trust with all of the appropriate "fundable assets" - her real property, her cash and savings accounts, certain wealth management accounts, and her tangible personal property.

The thought that kept her up at night was her granddaughter. Oh, how she loves that child - the one she helped raise when her own daughter passed away soon after giving birth. That granddaughter, who wants to go to college, yet her troubled marriage dictates otherwise - the strong woman would like to empower her granddaughter.

The grandmother wrestled with how to best take care of her granddaughter in the event there were assets remaining in the grandmother's estate at the time of her passing. The grandmother did not want to hurt the feelings of her two adult children; however, even though the oldest of her adult children did not have a great deal of commonsense when it came to the management of money, and her youngest adult child had creditors knocking on her door, it was her granddaughter who could use the most help.

Deciding to solve the matter, the grandmother met with her estate planning attorney. The grandmother confirmed that upon her passing her adult children and her granddaughter would share equally in the assets that were part of her revocable trust. She then asked for a modification of the trust's terms to establish three "spendthrift" trusts at the time of her passing, in essence setting aside the assets for the benefit of the respective beneficiary, but not at his or her discretion.

A spendthrift trust can be established as a testamentary trust through a last will and testament or through a revocable trust. The establishment of a spendthrift trust does not postpone vesting of any interest in a beneficiary.

§ 64.2-743 of the Code of Virginia states, "A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary's interest."

The Trustee of the spendthrift trust retains the interest upon a separate trust and pays to the beneficiary as much of the net income or principal as the Trustee may deem appropriate to provide for the beneficiary's support, health care, education, or other needs until the beneficiary reaches a pre-determined age, death occurs or other stated condition, when the interest shall be distributed outright to the beneficiary. If the beneficiary dies before the pre-condition is reached, the interest shall be paid over per the terms set forth in the originating document.

The grandmother had a two-fold objective when she took the extra step of adding the spendthrift trust language. The first was to make sure that assets intended for the grandmother's two adult children upon her death were going to be used wisely and not spent upon immediate distribution, and to protect the same from creditors. The second was to make sure the distribution that vested immediately with the granddaughter upon the death of the grandmother was protected and would not become the property of her granddaughter's spouse in the event of a divorce.

The grandmother's primary motivation in reviewing and modifying the terms of her revocable trust was in essence to direct the stewardship of her assets for the benefit of her granddaughter.

The grandmother was intent on ensuring, that any asset that passed to her granddaughter would not be distributed outright to her granddaughter, but would be kept in a separate trust - used for the benefit of her granddaughter, but not at her discretion. Therefore, providing a means of financial assistance for her granddaughter.

Though the assets would be used to help maintain the granddaughter's quality of life, large distributions were unlikely to be made directly to the granddaughter, and there would exist little chance of having the funds comingled with those of the granddaughter's spouse. Thus, if the assets were not comingled and were still recognizable as an inheritance, in the event of a divorce a successful claim by the estranged spouse would be unlikely.

The grandmother had prepared well for her own care and had determined if she had funds remaining at the end of her life she would direct the use of those funds. Her reward - knowing her granddaughter would be provided for, was commensurate with her planning and purposeful stewardship.