When is a spendthrift trust a good estate planning tool?

On Behalf of | Nov 5, 2020 | Trusts

Maybe one reason you’ve been postponing your estate planning is that you want to leave an equal share of your assets to all of your adult children, but you’re concerned about what one (or perhaps more) of them will do if they inherit a large amount of money. You don’t want to disinherit them. However, you don’t want your hard-earned money to be spent on frivolous purchases, taken by creditors or – even worse – spent on drugs, gambling or other addictions.

If you’re in this situation, you’re not alone. A common solution is something referred to as a “spendthrift trust.” Actually, it’s a regular trust with a spendthrift clause. It can allow you to leave money to a loved one who’s not financially responsible while limiting their (and others’) access to it.

You will need to choose a responsible person to manage the trust and the disbursements from it. It’s important to carefully consider whom to choose as the trustee. Naming another one of your children as the trustee can create or widen a serious sibling rift.

You will provide instructions that the trustee is obligated to follow. For example:

  • You may want to designate that the beneficiary can receive money from the trust to pay for their education and an additional amount every month, quarter or year.
  • You can designate that funds can be used from the trust to pay for emergencies such as medical bills or if their home is destroyed in a storm.
  • You can leave instructions that whatever amount remains in the trust can be paid in full to the beneficiary when they turn a particular age. Of course, whether it’s 25 or 65, that assumes that they’ll have outgrown their irresponsibility by then.

Be careful about putting conditions on a trust that have nothing to do with a person’s financial responsibility or dangerous habits. For example, conditions set to try to control things like whom a person can marry, what religion they can (or can’t) adopt and similar aspects of their life aren’t likely to hold up if challenged in court and will probably alienate your loved one from you while you’re still alive and from other family members after you’re gone.

Your estate planning attorney can answer all of your questions and provide valuable guidance if you choose to create a spendthrift trust and as you develop your entire estate plan.