In reviewing your estate plan, you have definite concerns. And those concerns relate to one of your adult children. He has never had a good relationship with money.
Through the years, there has been a checklist of challenges and poor decisions, including a failed business, bankruptcy, drug addiction and divorce. You love your son and want him to improve his life, but you also must be realistic. As one of your beneficiaries, he could take his inheritance and blow it all in the blink of an eye. As you look to update your estate plan, it is time to consider an important safeguard: a spendthrift trust.
Trustee follows your instructions
A spendthrift trust protects its assets from creditor claims, but more significantly, from the actions of the ne’er-do-well beneficiaries who have poor relationships with money.
Assets within the trust no longer belong to you. They belong to the trust and are untouchable to creditors seeking payment on debt accrued by one of your beneficiaries. At the same time, your beneficiaries cannot gain access to the funds on their own.
It is the job of your designated trustee to distribute the assets based on your instructions. Since you feared that your son may blow his entire inheritance in a short amount of time, you have instructed your trustee to only provide money in small increments.
A will does not provide same protection
Consider this scenario. Your trust contains $1 million and annually generates income of $50,000. Your son may receive that latter amount – the income from the trust – in annual distributions from the trustee. If your son makes a frivolous and expensive purchase and no longer has the ability to make payments, creditors can only collect from that $50,000 distribution and not from the $1 million principal.
A will does not provide the same protection. If your will deemed that your son receives a $1 million inheritance, it is now fair game to creditors.
It is an irrevocable trust
Other facts about this important estate planning tool:
- A spendthrift is an irrevocable trust. Its terms cannot be changed in any way, but exceptions do exist in rare circumstances.
- In general spendthrift trusts are protected from divorces, bankruptcies, lawsuits and dishonest family members.
A spendthrift trust can be your savior by protecting your assets for a long time.
Principal remains intact
Your assets are safe, and the principal remains intact within a spendthrift trust. Creditors have no other choice but to wait. In addition, some beneficiaries may be unhappy because they cannot access that large amount of money.