Financial advisors and tax professionals seeking to help clients protect trust assets in the event of divorce, lawsuits or an extravagant heir should know the basics of a spendthrift clause.
An ever-growing alphabet soup of trust entities enable planners to assist clients in moving assets out of their taxable estates. However, without the right so-called "spendthrift" protections in place and an understanding that the rules for those clauses vary a great deal between states, the clients could face threats to the orderly distribution of their estates. Such problems might be avoided by planners suggesting that clients speak with an attorney who is knowledgeable on the
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The idea for spendthrift clauses — or separate standalone entities known as spendthrift trusts — stems from the principle behind
"In the current environment, financial advisors are often pushed into more of a review and summary function for trusts, and perhaps the lowest-hanging fruit is simply confirming that a spendthrift clause exists and explaining its benefits to clients," Bridgers said.
The clause "protects the trust assets from divorce," but that plays out differently depending on whether the location of the entity was established under "a more protective state law," according to Steven Oshins, an attorney with law firm
"Financial advisors should make sure to work with estate planning attorneys who include asset protection in their planning. That way, when they have a client who should take some chips off the table, they have the means to put the planning in place," Oshins said. "One of the key items that is missed all the time is that different states have different levels of spendthrift protection. It is surprising that nearly all estate planning attorneys limit their trust situs to their home jurisdiction, rather than thinking outside the box and using the better laws found in other jurisdictions."
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As they guide clients through the concept, the advisors who don't have law licenses will need to "be careful how deep and how far they go" into the actual content of the spendthrift clauses, according to Martin Shenkman, the founder of
"Financial advisors should be proactively involved in most phases of estate planning, and they should be the catalysts for estate planning," Shenkman said. "If you as a financial advisor cross the line into the unauthorized practice of law, you may not have coverage under your E&O policy."
The issues connected to spendthrift clauses carry a major impact
"The spendthrift clause is only effective so long as property is in the trust," Bridgers said. "Once the toothpaste is out of the tube, you can't put it back in and regain the protection."
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Even as they stop short of what may be considered legal services or advice, the advisors can still disavow their clients of "this strange misconception that, 'Oh, I set it up. I don't have to look at it because it's done,'" Shenkman said.
For example, they ought to keep in mind that "almost every older trust" includes language transferring assets to an heir at a specified age, but that scenario isn't taking into account what could happen if, say, the beneficiary gets divorced or sued a year later, he said. The advisors can make a big difference by spotting the potential problem and sending them to an estate attorney.
"That is in an incredibly common situation," Shenkman said. "That's a huge asset protection play. That to me is the kind of place where wealth advisors have a very valuable role."
