Like most people, you probably worry about how your family will fare after you’re gone. Wills, trusts and other estate planning tools can help you give your loved ones the means to thrive. There’s just one problem—how do you make sure their inheritances last?
Perhaps you have a family member that is prone to overspending. Or maybe you worry about your child losing their inheritance to irresponsible debt. Whatever the case may be, it is normal to want your family to be financially secure for as long as possible.
The good news is that there are many ways you can protect your family from their own financial mismanagement. One option is to create a spendthrift trust.
Here’s what you need to know about it.
What is a spendthrift trust?
As the name suggests, a spendthrift trust is designed to protect your assets from being quickly spent or seized by creditors. In other words, it can help prevent your beneficiaries from wasting their inheritance or losing it to debt.
People create spendthrift trusts for various reasons. You may want one for your estate if you have a beneficiary that:
- Tends to make large, unnecessary purchases
- Has difficulty budgeting, saving or making sound financial decisions
- Has or is prone to large amounts of debt
- Struggles with gambling, drugs, alcohol or other addictions
- Is vulnerable to financial exploitation
- Is too young to manage their inheritance responsibly
Essentially, this kind of trust can help provide long-term financial stability for your beneficiaries who might otherwise struggle to manage their inheritance.
How does a spendthrift trust work?
Like any other trust, you will assign a trustee to manage your assets in the trust. They will manage the assets and control withdrawals or disbursements. The trustee can be you while you are still alive, but you will need to name a successor trustee for when you pass.
You can outline specific rules or instructions for how and when beneficiaries receive their share. For example, suppose your child is prone to overspending if they have access to large amounts of cash. In that case, you can set a rule that will disperse only a limited amount of cash every month instead of a lump sum.
Spendthrift trusts are generally flexible. If you want to design yours to fit your family’s exact needs, consider talking to an estate planning attorney who can guide you through the process.