What is a spendthrift beneficiary?

One of the main reasons to create a trust or an estate plan is to protect the assets you wish to pass on to beneficiaries.  

What or Who is a "Spendthrift"? 

Definition of spendthrift:  A spendthrift is someone who spends money prodigiously and who is extravagant and recklessly wasteful, often to a point where the spending climbs well beyond his or her means.  

The Beneficiary that is a Minor. 

Sometimes a beneficiary will soon be turning 18 or 21 and will become entitled to ownership of assets.  Or sometimes a young or irresponsible person is on the verge of being entitled to a distribution from the estate or a terminating trust.    In the case where outright distribution to the individual of substantial assets would be more harmful than helpful, there are a few alternatives that might defer until later the distribution of assets to what is called a "spendthrift beneficiary". 

Can Funds for a Beneficiary No Longer a Minor Be Kept in a "Custodianship"? 

In Wyoming, where the the individual is no longer a minor, there is a "custodianship" when it would be best for the assets not to be distributed outright.   The statutes provide:   (1) the involuntary appointment of a conservator to receive the assets due to the beneficiary being "mentally incompetent", or (2) an extension of the custodian term under Wyo. Statute 34-13-139.  

Because there is a big distinction between irresponsible judgment and incompetent judgment, a conservatorship will not be available in most situations.  Even if the custodian (or trustee, executor) can convince the minor to agree to the extension, the maximum age permitted in Wyoming for the duration of a custodianship is 30.  

What is the Protection After Distribution? 

However, the executor, trustee or conservator (" custodian") for an individual who has attained the age of majority might be able to structure the assets in a manner that will provide the individual with some protection after distribution.  The trustee has the power to invest and reinvest custodial property prudently.  Trustees are granted all of the rights, power and authority over custodial property that unmarried adult owners have over their own property.  These very broad and general powers are subject to the prudent person rule and to the duties of segregation and record keeping. 

What Are The Rule for Investing the Beneficiary's Money? 

Similarly, executors, guardians and trustees are authorized to invest in a manner which is prudent.  Under the Wyoming Prudent Investor Act, a fiduciary may invest in any kind of property of the type of investment consistent with the standards of the Act, subject to the duty to use "reasonable care, skill and caution".  The duty of prudence appears to be fulfilled if the value of the assets are unimpaired.  

The fiduciary can take into account the beneficiary's needs for liquidity and can consider the need to preserve the capital.  It seems that investment by a fiduciary in a limited partnership or a limited liability company would pass muster as a prudent investment and comply with Wyoming law. 

For example, delivery to the irresponsible beneficiary some interest in a limited liability company or other closely held entity that the fiduciary continues to manage would then require the beneficiary to convince the court that the fiduciary had somehow harmed the beneficiary.    Ownership in a Wyoming limited liability company are assets that are not "spendable".  

Specifically, transferring the custodianship estate or trust assets inside a limited liability company exposes the issue of whether the sole purpose of depriving the spendthrift beneficiary is prudent.  It would seems that it would be prudent because combining the spendthrift beneficiary's assets with other family assets in an overall family enterprise provides the additional benefit of enhanced investment opportunities through centralized management of a larger common fund, as well as the benefit of investment expertise. 

There is a discussion of the double protection of a limited liability company and a trust on this site.  

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