Sometimes you have to hold the reins tight, especially when it comes to money. A spendthrift trust does exactly that.

“This protects people from themselves. Say someone has a drug, alcohol or gambling problem, or someone ... is married to a wild spender,” says Eric Kramer, a partner in the trusts and estates practice at Farrell Fritz in Uniondale.

A spendthrift trust (or asset protection trust) gives an independent trustee full authority to make decisions as to how to spend the funds in the trust. The beneficiary might receive trust benefits as regular payments or need to ask permission from the trustee to access funds at certain times. “Not only does this ensure the money isn’t squandered, a spendthrift trust also protects the funds or property from the beneficiary’s creditors,” says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.

But there are other things you need to know about asset protection trusts:

Understand the taxes

“If the trust is the beneficiary of retirement accounts, the trust must be designed to have the RMDs [required minimum distributions], at a minimum, flow through the trust down to the beneficiary," points out Patrick Simasko, an estate planning attorney with Simasko Law in Mount Clemens, Chicago. "If the trust accumulates the income, it could be a taxable event and" in that case, the trust would have to pay "the tax at a trust tax rate, which is substantially higher than an individual” rate, he added. 

Pick your trustee carefully

Consider a professional corporate trustee. Says David Silversmith, a trust and estate high-net-worth tax manager with Grassi & Co. in Jericho, “If the wrong trustee is chosen, they could withhold money from the beneficiary even when the beneficiary legitimately needs it.”

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