When you do your estate planning, one useful tool that you might want to consider is a spendthrift trust. These types of trusts are useful when you have heirs who may not be able to manage a large influx of cash.
For instance, if you have an heir who has struggled with drugs or alcohol, or a gambling addiction, you don’t want to provide them with unfettered access to a sum of money that could wind up being their undoing. Still, you want to ensure that their needs will continue to be met regardless of their life circumstances.
Enter the spendthrift trust
By funding a spendthrift trust, you are able to set the terms and frequency of the disbursements. You appoint a trustee who will oversee the trust and make sure that your heir receives disbursements as you intended. But it keeps your heir from being able to access the principal and fritter it away.
Adds protection from creditors, spouses
Maybe you are less worried about the damage your heir could do than what their spouse might be planning for the funds you intend to leave your loved one. A spendthrift trust will not be accessible to the spouse nor the proceeds be part of any divorce settlement should they legally part ways in the future.
Should your heir ever be pursued by debt collectors or be subject to a judgment where they owe money, the trust’s funds cannot be seized and paid out.
Whom should you appoint as trustee?
It is usually not a good idea to put one sibling over another sibling as the trustee for a spendthrift trust. This is because doing so can alter the dynamics of their sibling relationship and foment distrust or resentment.
It is far better to choose an unrelated third party as trustee to oversee the trust and its disbursements. A financial or legal professional is often a good choice for this role as they will know the rules they must follow and how to manage the principal.
Is a spendthrift trust right for your heirs?
Only you can make that determination. But presumably, you know your heirs well and can anticipate some of the problems that they might encounter after you have passed on. In many cases, a spendthrift trust can be the right solution for your circumstances.