You want a thorough and sound estate plan. However, something bothers you, and that is your children’s relationship with money and their questionable decisions centered on money. You may describe such behavior has irresponsible and reprehensible, but you must keep this in the forefront of your thoughts when deciding what to do with your sizable estate.
A potential and advantageous solution is a spendthrift trust. This effective agreement is not only designed to protect your beneficiaries’ inheritance from creditors, but also it protects the beneficiaries from themselves, so they do not waste their inheritance.
When beneficiaries have bad spending habits
A spendthrift trust is the safeguard measure that you need if your children have an unhealthy relationship with money. For example, maybe they excessively spend money without any second thought. Or maybe they have gambling or illicit drug habits that are costly, or a history of failed business ventures and bankruptcy filings.
The trustee of the spendthrift trust has the freedom to not provide distributions. Another aspect of the spendthrift trust is that it only allows the trustee to transfer assets to the beneficiaries.
Creditors only may access distributions
Creditors would be out of luck, and this is intentional. Creditors may pursue payments from the trust’s distributions and not the trust itself.
Consider this example. Say you have created a trust worth $4 million, and it annually generates $200,000 from investments. If the trustee distributes that $200,000 to the beneficiary, creditors can only attempt to collect from those distributions and not the trust. The trust remains out of reach of those creditors.
Generally, spendthrift trusts also are invulnerable from lawsuits, divorces and bankruptcies, and protected from untrustworthy family members.
They may thank you some day
A spendthrift trust’s principal remains intact and protected, leaving some creditors still waiting and some beneficiaries disgruntled. However, that latter group may some time in the future realize the intent of this estate planning tool and applaud the person who created it.