Any good estate planning attorney knows that protecting your children from frittering away an inheritance is one of the main reasons for a spendthrift trust. In addition, protecting children from divorce and other money problems is another popular reason for a spendthrift trust, according to Kiplinger in “How to Keep Your Heirs from Blowing Their Inheritance.”
We all want the best for our kids, and if we’ve been fortunate, we are happy to leave them with a nice inheritance that makes for a better life. However, regardless of how old they are, we know our children best and what they are capable of. Some adults are simply not prepared to handle a significant inheritance. They may have never learned how to manage money, or may be involved with a significant other who you fear may not have their best interests in mind. Or perhaps there are problems with drug or alcohol abuse that concern you. Or perhaps they are simply not ready for the responsibility that comes with an inheritance. All of these are valid reasons for a spendthrift trust in the estate plan.
Don’t feel bad if your children aren’t ready for an inheritance. How many stories do we read about lottery winners who go through all their winnings and end up filing for bankruptcy? They simply aren’t psychologically ready for sudden wealth.
As the old saying saying goes, “dollars inherited spend easier than dollars earned.”
A spendthrift trust protects heirs, by providing a trustee with the authority to control how the beneficiary can use the funds. A trust becomes a spendthrift trust when the estate planning attorney who creates it uses specific language indicating that the trust qualifies as such, and by including limitations to the beneficiary’s control of the funds.
A spendthrift trust also protects assets from creditors, because the heir does not own the assets. The trust owns the assets. This also protects the assets from divorces, lawsuits, and bankruptcies. Other reasons for a spendthrift trust include keeping the money out of the hands of manipulative business partners, family members, and even “friends.”
Once money is paid to the beneficiary from the trust, however, the protections for that money paid to them go away. But as long as money is in the trust, it enjoys protection. So to consume as needed, but protect the rest, is a good strategy.
The trustee in a spendthrift trust has a level of control that is granted by you, the grantor of the trust. You can stipulate that the trustee is to make a set payment to the beneficiary every month, or that the trustee decides how much money the beneficiary receives, which is known as a discretionary trust. A discretionary trust has the greatest asset protection and the greatest flexibility. So long as you “trust” your trustee’s judgment, and the trustee understands your reasons for creating a spendthrift trust, a discretionary trust is a great option.
For instance, if the money is to be used to pay college tuition, the trustee can write a check for tuition payments every semester, or they can put conditions on the heir’s academic performance and only pay the tuition if those conditions are met.
For a spendthrift trust, carefully consider who might be able to take on this task. Be realistic about the family dynamics. Sometimes, a professional firm, bank, or investment company may be a better, less emotionally involved trustee than an aunt or uncle.
If you need more information on choosing the right trustee, review this article by the author.
An estate planning attorney can learn about your unique family circumstances, as well as your most important goals and concerns, and help determine whether your reasons for a spendthrift trust warrant including one in your estate plan.
Reference: Kiplinger (June 5, 2019) “How to Keep Your Heirs from Blowing Their Inheritance.”