Spendthrift trusts can protect your children from themselves.
You are setting up your estate plan.
As you consider your goals, you want to be wise when leaving an inheritance for your children.
You also acknowledge your children may make poor decisions with a windfall of cash.
What can you do?
According to are recent NWI.com article titled “Estate Planning: What to do to protect trusts from a spendthrift,” an inheritance trust with spendthrift provisions may be a wise option.
As an alternative to an “outright” distribution of the inheritance to your children, an inheritance trust with spendthrift provisions allows you to meet the your goal of leaving an inheritance and address your concern.
With an inheritance trust with spendthrift provisions you can leave assets to an heir but give control over those assets to someone else.
The person charged with managing the trust for the benefit of your children is called a trustee.
If an inheritance trust with spendthrift provisions sounds unsuitable because you are not super wealthy and it would be expensive to create, think again.
While an inheritance trust with spendthrift provisions may be created under a revocable living trust, some states allow such a trust to be created under a last will and testament.
When created in that way these trusts are known as testamentary trusts.
If you are planning to fund a testamentary trust using a life insurance policy, you or your estate planning attorney will need to contact the insurance company about whether this is permitted under the life insurance contract.
Not all life insurance policies allow a testamentary trust to serve as the beneficiary.
If this is not sufficient for your estate planning needs, an inheritance trust with spendthrift provisions may still be worth the extra expense.
What would the trust look like?
You could set a timeline of distributions over a given time period to protect the heir from wasting a lump sum of money.
For example, your children could receive outright distributions of principal with one-half at age 25 and the balance at age 30.
You also could assign benchmarks to any distributions such as finishing college or holding a job for a given period of time.
This is known as an “incentive” trust.
If you are concerned with the negative choices of an heir, you can withhold distributions if the sir engages in certain behaviors such as drug use your gambling.
Alternatively, you could provide that the inheritance trust with spendthrift provisions continue throughout the lifetimes of your children to the next generation and even beyond.
In my 27 plus years of assisting clients with their estate plans, I have seen this approach successfully protect the inheritances left by my clients both “from” and “for” their descendants.
After all, it takes a lifetime of hard work and thrift to build and estate, but it can take no time at all to squander it or have it taken through divorces, lawsuits, and bankruptcies.
If spendthrift trust planning sounds appealing, discuss your goals and family circumstances with an experienced estate planning attorney to create a plan to meet your needs.
Reference: NWI.com (May 17, 2020) “Estate Planning: What to do to protect trusts from a spendthrift”