Knowledgeable, Effective Guidance

Could a spendthrift trust work for your estate plan?

On Behalf of | Jan 15, 2022 | Uncategorized |

One thing to consider when doing your estate planning is how your beneficiaries will react to inheriting an often-significant sum of money. Many might have no problems managing their funds. However, it is also common for some beneficiaries to struggle with the management and stewardship of the money.

You love your beneficiaries and don’t want to provide them with cash that could potentially be used in ways that are not conducive to their health and well-being. Is there a way to protect them?

Spendthrift trusts are viable options

There are numerous reasons to consider funding a spendthrift trust for beneficiaries. Among them are these:

  • Your intended beneficiary has proven their inability to manage money
  • They are addicted to drugs, alcohol, gambling or shopping to excess
  • They are married to a sketchy spouse who could browbeat them into providing access to funds
  • Your beneficiary works at a profession where the funds could be drained by a lawsuit, e.g., physicians
  • The beneficiary is a bankruptcy risk

While this list is not all-inclusive, these are common situations in which trust grantors often err.

How spendthrift trusts work

These financial instruments protect the trust principal so the beneficiary has no direct access to it. Instead, you appoint a reputable individual as trustee to oversee the management of the trust and arrange its disbursements to your beneficiary.

Trust grantors set the terms of the disbursements. They can be annually, semi-annually, quarterly or even monthly. This can extend preserve the funds from dissipation and potentially last the duration of your beneficiary’s lifetime.

Creditors have no claims to these funds

If your beneficiary gets sued or files for bankruptcy, the funds remain protected. However, once disbursements are made, this protection is voided.

A special tip

It is best not to use individuals who are related to the beneficiaries as trustees over their funds. This can disrupt formerly close relationships between siblings, parents and children and other family ties. Instead, for your peace of mind, appoint a disinterested third party as trustee of the spendthrift trust.