Building wealth isn’t just about making money—it’s about making sure that it lasts. If you’ve worked hard to create financial security, the last thing you want is for it to disappear overnight. Handing over a large inheritance all at once might seem generous, but without the right protections in place, those assets could be blown on bad financial decisions, wiped out by creditors, lost in a messy divorce, or taken in a lawsuit.
A spendthrift trust is one of the most effective estate planning tools for individuals who want to provide for loved ones while ensuring their wealth remains protected and well-managed. This type of trust limits a beneficiary’s direct control over their inheritance while still allowing them to benefit from it—all under the supervision of a trustee.
What Is a Spendthrift Trust?
A spendthrift trust is a legal arrangement that allows you to set aside money and assets for a beneficiary while restricting their direct access to the funds. Unlike a traditional inheritance, where the beneficiary receives a lump sum, a spendthrift trust allows for structured, controlled distributions that prevent irresponsible spending or loss to creditors.
Who Benefits from a Spendthrift Trust?
This type of trust is particularly useful if:
- You have an heir who struggles with money management or has poor financial judgment.
- You’re concerned about your beneficiary losing assets to creditors, lawsuits, or divorce settlements.
- Your heir has a history of substance abuse or gambling and might misuse their inheritance.
- You want to ensure long-term financial stability for a child or family member with disabilities.
- You want to preserve generational wealth and prevent a large inheritance from being recklessly spent.
By limiting direct access to the trust funds, you can ensure your loved one is financially supported while still protecting assets from bad decisions, external threats, and financial misfortune.
How Do Spendthrift Trusts Work in Kentucky?
Under Kentucky law, a properly structured spendthrift trust offers strong legal protections against creditors and financial risks. However, there are specific rules and limitations to consider.
1. The Role of the Trustee
Every spendthrift trust requires a trustee, who is responsible for managing the assets and distributing funds according to the trust’s terms. The trustee may be:
- A trusted family member
- A professional fiduciary
- A trust company or financial institution
The trust document outlines how, when, and under what conditions distributions can be made. For example, you may decide that:
- The beneficiary receives a monthly or yearly stipend.
- The trust pays for specific expenses like education, housing, or medical bills.
- The trustee has full discretion to approve or deny distributions based on the beneficiary’s needs.
2. Protection from Creditors & Lawsuits
A major advantage of a spendthrift trust is that creditors cannot access the assets held within the trust. This means that if your beneficiary owes money, creditors cannot force the trustee to release funds. Also, the trust cannot be used as collateral for loans and assets are protected from lawsuits, business failures, and divorce settlements. However, once funds leave the trust and are distributed to the beneficiary, they are no longer protected and could be subject to any collection efforts.
3. Exceptions to Protection
While spendthrift trusts provide strong asset protection, there can be exceptions depending on the jurisdiction, specific trust terms, and other circumstances such as:
- Child support and alimony – Courts may order distributions to satisfy support obligations.
- Certain tax debts – In some cases, state and federal tax claims may override trust protections.
- Fraudulent transfers – If the trust was set up to defraud creditors, it may be challenged in court.
A well-structured spendthrift trust can minimize these risks while maximizing asset protection.
Setting Up a Spendthrift Trust in Kentucky
Creating a spendthrift trust involves several important steps to ensure it is legally sound and meets your financial goals.
1. Drafting the Trust Agreement
A trust agreement is a legally binding document that dictates how the trust will operate. It should specify:
- Who the trustee is and what powers they have.
- Who the beneficiary is and their rights.
- How distributions are made (e.g., fixed payments, need-based distributions, or trustee discretion).
- What restrictions apply to prevent misuse of the funds.
2. Choosing the Right Trustee
The success of the trust often falls on the competence of the trustee. This is why it’s so important to choose the right one. While many people choose a trusted family member, others opt for a neutral third-party professional in order to prevent disputes. Professional trustees can offer impartial oversight and ensure the trust operates as intended.
3. Funding the Trust
A spendthrift trust can be funded with various assets, including:
- Cash or investment accounts
- Real estate holdings
- Stocks and business interests
- Life insurance payouts
Once assets are placed in the trust, they are legally separated from the beneficiary’s personal finances, which provides long-term protection.
Potential Drawbacks to Consider
While a spendthrift trust offers many benefits, there are some potential drawbacks:
- Loss of control for the beneficiary – Heirs who are financially responsible may feel frustrated by the restrictions.
- Trustee conflicts – Disagreements may arise over distribution decisions.
- Administrative costs – Hiring a professional trustee may involve ongoing management fees.
- Limited protection in some cases – Courts may override some trust protections for child support, alimony, or fraud claims, depending on the specific trust terms and circumstances.
Despite these challenges, a well-structured trust can help strike the right balance between financial security and responsible asset management.
Secure Your Wealth with a Spendthrift Trust
It can be challenging to protect your assets while also ensuring that your beneficiaries are financially supported. A spendthrift trust is an excellent estate planning tool for achieving exactly that.
At Berkley Oliver, PLLC, our attorneys help individuals design customized trusts that provide long-term security, legal protection, and financial control. Contact us to schedule a consultation and learn how a spendthrift trust can secure your wealth for generations to come.