Protective trusts — spendthrift, supplemental needs and special needs, education, and minor’s trusts — let you parcel out money when you feel the time is right or specify exactly how the trust money is to be spent.
In addition to a spendthrift trust, you can specify spendthrift provisions on other types of trusts, such as a discretionary trust. With a discretionary trust, the trustee — the person in charge of the trust — has the power to control the trust’s payments to the beneficiary or beneficiaries. Included in those powers is the discretion to make no payments at all!
Despite the spendthrift provisions that keep creditors at bay, the courts allow certain types of claims (alimony and child support, for example), which you need to consider when setting up the trust.
Spendthrift trusts: The rules that apply to a spendthrift trust are straightforward. The beneficiary (for sake of this example, your somewhat spoiled son) can’t touch any of the property in the trust; he only owns the payments that have been made to him.
Additionally, your son’s creditors can’t seize the property in the trust. The creditors can, of course, go after the money in dribs and drabs as it comes out in payments to your son, but they can’t grab the entire property itself.
Supplemental needs and special needs trusts: A supplemental needs trust is designed to support a disabled, elderly, or handicapped person in such a manner as to not jeopardize or reduce that person’s eligibility and qualification to receive private or public benefits, such as Medicaid. Furthermore, a supplemental needs trust also protects the assets in the trust from creditors’ claims. The supplemental needs trust adds funds to cover the beneficiary in addition to the public or private funds.
Educational trusts: An educational trust provides payments to the beneficiary for education-related needs: tuition, books and supplies, and so on. Educational trusts usually contain provisions that halt payments if, for example, the beneficiary drops out (or flunks out) of school.
When you talk with your advisers, make sure that you cover these items:
What happens to any leftover funds in the trust?
What happens if nobody from the beneficiary list decides to go to college?
What happens if everyone on the beneficiary list receives full scholarships and nobody needs the money?
When does the educational trust terminate?
Minor’s trusts: A minor’s trust is a way for you to make gifts to minors (for example, your three children, ages 5, 7, and 10) and still take advantage of the annual exclusion from gift taxes ($11,000 per person).
When the minor reaches majority, the property in the minor’s trust becomes his or hers, because he or she is no longer a minor. (Happy birthday!)