How is a Spendthrift Trust Affected by Bankruptcy in NJ?

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If someone close to you has passed away and made you the beneficiary of a spendthrift trust, you may be wondering exactly what this means. First and foremost: your loved one cared enough to think about and plan for your financial future after they were gone.

A spendthrift trust is typically left to a beneficiary who is dealing with one or more of the following:

  • Past or present financial difficulties
  • Addiction(s) that may lead to irresponsible spending
  • Significant debt(s) that may entitle creditors to the beneficiary’s assets

Spendthrift trusts are set up with a trustee in place. The trustee is in charge of distributing funds from the spendthrift trust to the beneficiary on a set schedule. This type of spendthrift trust acts as a form of income for the beneficiary, and prevents them from wasteful spending behaviors that may occur if they were to be granted the full amount in one lump sum.

Sometimes spendthrift trusts are set up so that the trustee does not distribute any money to the beneficiary. Instead the trustee will be directed to provide the beneficiary with goods and services that are paid for by the spendthrift trust. This type of situation is called for when the beneficiary is extremely irresponsible with money. The trustee typically uses the trust money to purchase groceries, clothing, and other monthly living expenses encountered by the beneficiary.

I want to file for bankruptcy. Will my creditors take my spendthrift trust money?

As we’ve talked about before, New Jersey bankruptcy law states that if a debtor files for bankruptcy in NJ, they are subject to a 180 day “look back” period with regard to inheritance money, life insurance funds and a number of legal settlements.

The 180 day look back period was instated to reduce abuse of the bankruptcy system. Essentially, if a loved one dies within 180 days of when you filed for bankruptcy, your creditors are technically allowed to take any financial windfall you may experience as payment on your defaulted debts.

A spendthrift trust does not allow even the beneficiary to have direct access to the funds, let alone the beneficiary’s creditors. Only the trustee has access to the money while it is in the spendthrift trust. However, once the trustee disperses any of the funds to the beneficiary, those funds become subject to creditors’ claims if the bankruptcy has been filed within the 180 day look back period.

Language can be inserted into anyone’s estate plan to prevent creditors from getting any of the spendthrift money. This will, of course, require you to engage in a difficult and uncomfortable conversation with the person whose will in which you are named as a beneficiary.

The language used must specifically state that if you (the beneficiary) file for bankruptcy during the 180 day look back period, that you are not entitled to any money in the spendthrift trust until 181 days after the date of death.

If you or a loved one need help setting up a spendthrift clause in your estate planning paperwork, seek assistance from a New Jersey estate planning attorney to ensure that the correct language is used. Estate planning is a significant life event that must be taken seriously as it can have a powerful effect on the lives of the beneficiaries.

 

Image credit: Terry Johnston
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