When doing their estate planning, some people face the conundrum of how to provide for heirs who are less than fiscally responsible. They want to offer them a path to financial security without the consequences of wanton spending.
It’s a delicate balance between the two, but the good news is that there are ways to provide for and protect your heirs and loved ones. One way to do that is by funding a spendthrift trust.
What it is and how it works
Spendthrift trusts are like regular trusts, with the added protection of having a trustee you appoint overseeing the disbursements from the trusts to your heirs and beneficiaries. The amounts and frequencies of the monetary distributions can be preset and disbursed annually, semiannually, quarterly, or on whatever schedule you choose.
The trustee manages the trust principal, which is inaccessible to beneficiaries, their spouses and creditors. This can give you peace of mind to know the funds won’t be drained by irresponsible beneficiaries or those who might seek to separate them from their money.
Choose trustees carefully
It is often preferable to appoint a trustee who is unrelated to your beneficiaries. While this may initially seem counterintuitive, it’s actually a very wise move. Appointing a professional trustee rather than a parent, sibling or child over the funds of their relative can preserve the relationships between the parties.
Other benefits of spendthrift trusts
These trusts not only protect beneficiaries who lack experience managing their money. They also protect heirs whose livelihoods leave them exposed to litigation and judgments against them. The funds in the trust are off-limits to plaintiffs who prevail in lawsuits against your beneficiaries, e.g., lawyers or doctors accused of malpractice.
While not everyone will need a spendthrift trust, those who may should consider incorporating them into their estate plan.