You have concerns about the ways that some of your adult children manage their money. One lives beyond his means, purchasing items he cannot afford and racking up a great amount of debt. Another has been in trouble with the law and likely has a substance abuse problem.
You keep this firmly in mind when creating or revising your estate plan. Your plan is to simultaneously protect your estate and your beneficiaries. An ideal tool for such a situation is a spendthrift trust – a safety device within an estate plan. What does it do? It protects beneficiaries’ inheritances from creditor claims, and from themselves and the poor financial decisions they may make.
Protects trust from creditors and beneficiaries
Let us say that you as the grantor created a spendthrift trust worth $4 million, and your four children each receive annual distributions of $75,000, If any of your children fall into deep debt or even bankruptcy, creditors may only collect on that distribution and not the trust. As a result, the trust remains intact.
Within the spendthrift clause, you may include terms for the trustee to cease distributions to beneficiaries under certain circumstances. What could those circumstances be? It may be an assortment of things. Maybe the beneficiary has gambling, substance abuse or tax-related problems. Thus, the trust remains protected from the beneficiaries who may subscribe to ne’er-do-well behavior.
An ideal choice for some
As an irrevocable trust, the spendthrift trust has another advantage over some other trusts. It continues to exist even after the grantor’s death. That way, the trustee may continue to oversee the funds until he or she is ready to give control of the trust to the beneficiaries. In certain other trusts, once the grantor dies, the trustee distributes the remainder of the trust’s assets.
A spendthrift trust may not be ideal for everyone. However, it just may be the right choice for you. In the end, money within the trust remains untouchable to creditors and the bumbling decisions of its beneficiaries.