If you’re like most people, you want to protect your assets in case something happens to you. A spendthrift clause can help ensure that your loved ones are taken care of even if an heir beneficiary is unable to manage their own finances. In this blog post, we’ll discuss how spendthrift clauses work and how they can benefit your family in North Carolina.

What is a Spendthrift Clause?

First, let’s look at what a trust is. Trusts are legal frameworks that hold assets, much like a business’s incorporation documents let the business own assets. There are different types of trusts, but if you want to protect your assets from creditors or other threats, you’ll generally want to open an irrevocable trust.

An irrevocable trust allows your trust to own assets and distribute them to your heirs in the way that you direct. However, the most crucial benefit of an irrevocable trust is that since the trust owns the assets, creditors and heirs alike cannot take assets out unless your trust documents allow for it.

A spendthrift clause in an irrevocable trust creates a “Spendthrift Trust,” limiting the ability of creditors or beneficiaries to reach assets. Drawing up a spendthrift trust can prevent a financially unstable heir from mismanaging their inheritance. It can also prevent heirs from taking out assets prematurely and limit creditor judgments and liens.

Instead of giving a lump sum, you can provide monthly asset benefits of a specific amount with a Spendthrift Trust. Heirs who struggle with financial difficulties can’t use the funds in the trust to pay off their creditors. And creditors cannot usually place liens or other judgments on the trust’s assets. (1)

How Does a Spendthrift Trust Work in North Carolina?

In North Carolina, spendthrift trusts are subject to the state’s spendthrift laws. The spendthrift laws protect your assets from creditors by making it difficult for them to attach or seize your property.

However, if your heir owes child support, the court may direct the trustee to pay a fair amount to the child out of the trust. But the court cannot order the trustee to pay more than the heir would receive if there were no spendthrift clause. (NCGS 29A-20-21)

Work with an experienced estate planning attorney to see if a spendthrift trust is right for you and your family.

How Can a Spendthrift Clause Benefit Your Family?

A spendthrift clause can benefit your family by protecting your assets from creditors and ensuring that your loved ones are taken care of after you’re gone.

You may use a spendthrift clause to protect heirs who:

• May go through a future divorce
• Spend money recklessly
• May consider bankruptcy
• Work in a litigious atmosphere
• Have an addiction: gambling, drugs, shopping, etc

If you’re concerned about an heir mismanaging their inheritance, you may give monthly asset benefits instead of a lump sum. This way, your heir can receive the money they need without access to the entire inheritance.

The spendthrift provision prevents your heir from using the trust funds to pay creditors off.

The Trustee’s Role in a Spendthrift Trust

Choosing a trustee is an essential part of setting up your Spendthrift trust. When you set up a trust with your estate planning attorney, you select a trustee to manage the assets in your estate. The trustee’s job is to give oversight and ensure the protection of the assets from creditors and reckless spending.

When choosing your trustee, consider that they may be distributing trust monies long after you’re gone. So you want to select someone wise and financially literate. 

Your trustee acts on the trust’s terms, so you also want someone trustworthy.  A trustee makes all fund distributions and manages the trust according to your terms. Talk with your estate planning attorney if you need help choosing an appropriate trustee.

How to Create a Spendthrift Trust in North Carolina

If you’re interested in creating a spendthrift trust, work with an experienced estate planning attorney to draw up clear legal documents that stand the test of time. You’ll also need to fund the trust with your assets, which may include the following:

• Real property: your home or rental property
• Cash savings: checking and savings accounts
• Retirement accounts: 401(k), 403(b), pension, etc.
• Life insurance policies
• Personal property: jewelry, art, cars, furniture, etc. 

After you fund the trust, the trustee manages and distributes the assets according to your terms.

A spendthrift trust may be right for you if you’re concerned about your assets being mismanaged or taken by creditors. Work with an experienced attorney to create a spendthrift trust and ensure that your loved ones are taken care of after you’re gone.

We Can Help

An experienced estate planning lawyer can help you choose the right type of spendthrift clause for your needs and prepare the legal documents necessary to establish the trust.

At Vail Gardner Law, we work to protect your assets from all kinds of dangers, including long-term care expenses, MERP, reckless heirs, creditors, and lawsuits. We can help you create a spendthrift trust and other necessary estate planning documents. Knowing that you’ve made plans to care for your finances and family can give you the peace of mind you deserve going forward.

Contact us today to schedule a consultation. We serve clients all across the triangle area with an office located in Durham, NC.