There are numerous reasons for holding assets in trust. From asset protection to probate avoidance, the list of reasons seems to expand daily. Recently, a client from Paris, Tennessee established a trust for the primary purpose of probate avoidance. Another purpose was to establish a spendthrift trust for a daughter who was having financial troubles and was expected to file for divorce in the near future. A spendthrift trust is a type of trust that restricts the beneficiary’s ability to force trust distributions. For example, if a beneficiary has accumulated credit card debt, failed to pay and has been sued for non-payment, the credit card company may be restricted from forcing the trustee to make a distribution from the trust to the beneficiary for the purpose of paying the debt. Special care must be taken to draft the trust document regarding trustee discretion.
In 2013, I passed a revision to the Tennessee Trust Code. One thing the bill did was to make clear that Tennessee’s version of the Uniform Trust Code clarified that the to the greatest extent possible, that the Settlor’s intent is followed when interpreting a trust. Where a trust document expressly states a “material purpose,” the trust is to be interpreted to meet that purpose. This is important. If your trust expressly states that a material purpose of the trust is to provide the trustee absolute discretion in making a distribution to a beneficiary, then a beneficiary’s creditor should not be able to force a trustee to distribute assets against the terms of the spendthrift clause.When discussing your estate plan with an attorney, it is important that the attorney focuses on the “why” of you estate plan, not just the “how” your assets will be distributed. If the attorney does not focus on the why, you may be setting up yourself and your heirs up for trouble in the future.