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Spendthrift trusts often call for a cautious approach

California is one of a number of states in which domestic asset protection trusts, which are also known as spendthrift trusts, can be used to safeguard assets. They have become more popular in recent years because they protect trust assets from creditors even when the grantor is a discretionary beneficiary. In addition to shielding assets from creditors, spendthrift trusts provide income and transfer tax planning benefits, allow for greater privacy and can be particularly useful when young adults inherit significant sums or beneficiaries do not pay U.S. taxes.

However, spendthrift trusts should be drafted carefully. Transfers that are primarily made to defraud creditors or delay or hinder the repayment of a debt may be considered voidable transactions and ordered undone. These rules apply to creditors who are known even if they have yet to surface, but unforeseen future creditors are generally not covered.

Courts often find it difficult to identify the intent necessary to label a transfer a fraudulent conveyance, and they usually make these decisions after weighing the amount of circumstantial evidence presented. Indications of malfeasance are known as badges of fraud, but they can sometimes be misleading and may not always convey intentions accurately. Spendthrift trusts are designed to provide grantors with access to their funds as a last resort when their financial situations become desperate, but they should not be used to hide assets from creditors or avoid legal debts.

Attorneys experienced with these types of trusts may take precautions to avoid even the suggestion of a fraudulent conveyance when drafting spendthrift trusts to protect their clients from complex and costly litigation and ensure that the assets placed into the trust are available to grantors should their situations change. When suggesting spendthrift trusts, it is often recommended that no more than 50 percent of a grantor's liquid assets be placed in them.

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