Bradley & Hammond's copyrighted spendthrift trust is designed for individuals with high net worth who seek the advantages of advanced tax planning and asset protection strategies.

The spendthrift trust has core characteristics which enable the trustee to take full advantage of IRC Section 643(b). Additionally, the trust has other characteristics which afford it tax and asset protection benefits. The trust is:

Irrevocable. The trust cannot be revoked or modified by the person who made the trust, the "settlor" or "grantor", and property gifted or sold to the trust cannot be revoked. This is different from a revocable living trust, where the settlor can modify the trust, freely convey trust property back to him or herself, and terminate the trust at any time. Assets gifted to an irrevocable trust by the settlor or grantor are no longer considered property of the settlor or grantor. The grantor cannot take the property back. It becomes trust property and the trust has its own legal and tax identity. Generally, income from assets in a revocable trust is taxable to the settlor, while income from assets in an irrevocable trust is taxable to the trust itself under federal and state fiduciary income tax rules.

Non-grantor. The term "non-grantor" describes a trust where the income of the trust is not taxable to the grantor. The grantor retains no control over property given to the trust, and the grantor or settlor is not a beneficiary of the trust. If the grantor is a beneficiary of the trust, the trust is at risk of being disregarded for tax purposes, and its income would be taxable to the grantor. In a non-grantor trust, the trust itself is taxed on its income and any distributions made to the beneficiaries are taxed to the beneficiaries as ordinary income. The grantor of a non-grantor trust transfers assets into the trust, giving up legal title and control over the assets which would would cause the trust's income to be taxed to the grantor. The trust is considered a separate taxable entity, and its income is taxed to the trust, rather than to the grantor. Compare this to a grantor trust, where the grantor retains control over the assets and pays income taxes on income from the assets in his or her individual capacity.

Complex. A complex trust, by IRC definition, is a trust that retains some if its income and does not distribute all of it to beneficiaries, or distributes some or all of the principal to the beneficiaries or charities. The trust provides for no mandatory distributions and that the trustee must comply with IRC Section 643(b) by allocating extraordinary dividends and taxable stock dividends to the trust corpus. Complex trusts, as compared to simple trusts as defined in the tax code, are subject to different tax rules which allow for more beneficial tax treatment.

Discretionary. A discretionary trust is a trust where the trustee has wide discretion over whether to make distributions, how distributions are made, and what is distributed. He or she cannot be forced to make distributions by any beneficiary even in a court of law. A discretionary trust allows the trustee to administer the trust in a way that maximizes tax and asset protection advantages, and to maintain confidentiality and control over the administration process and trust assets.

Spendthrift. A spendthrift provision in a trust prohibits the beneficiaries from assigning their interests in the trust or using it as collateral, and prevents a beneficiary's creditors from attaching any liens to trust property. The spendthrift provision also allows the trustee to protect a beneficiary from his or her own impulsive spending habits. The trustee has the discretion to make distributions in the best interest of the beneficiary; the beneficiary has no control over the assets.

For the right individuals and when used properly, the Bradley & Hammond spendthrift trust can be a valuable estate and tax planning tool. Our firm works closely with trust tax accountant Richard Stimson of TrustIFS to serve this niche client base. For more information on how distributable net income (DNI) and fiduciary accounting income (FAI) is determined under the trust, contact TrustIFS.