Trusts can do some amazing things. They can allow someone to control the distribution of assets long after they have passed away. They can segregate assets from an estate, allowing the maximization of estate tax exemptions and a minimization of estate tax liability. They can also serve to protect a beneficiary from him or herself by providing spendthrift protection.
A spendthrift trust allows a trustee to manage assets placed in a trust for the benefit of a beneficiary according to the terms of the trust document. Typically a trust will allow the trustee to make distributions for expenses related to a beneficiary’s health, support, education, and maintenance, though this standard could be loosened or tightened depending on the circumstances under which the trust was created. If a beneficiary is sued or otherwise pursued by creditors, the trustee need not make further discretionary distributions to the beneficiary, thereby preserving the trust assets.
There is a catch, however. Only sixteen states allow for the creation of self-settled spendthrift trusts, and Minnesota is not one of them. A self-settled trust is a trust created by a person for his or her own benefit in the hopes of creating a barrier between the person and creditors. If the creator of the trust is sued, the creditors are unable to reach the trust assets.
Even when a state allows for self-settled spendthrift trusts, there are strict requirements. South Dakota’s self-settled trust laws require, among other things, a trustee to be located in South Dakota permanently. That means that the person or entity managing the trust typically has to be a South Dakota resident — for this reason, a professional trust company is generally hired to act as the trustee. The trust must be governed by South Dakota law, so it will typically be drafted by a South Dakota attorney. Some of the trust property must be located in South Dakota, and any transfer to the trust must not be fraudulent and has a two-year statute of limitations (meaning if the person creating the trust is sued during the first two years, the assets are not protected).
The creating of any trust is a job for a professional. If you have questions about trust planning, speak to a qualified trust attorney.