Parents who have the means to leave significant portions of their estate to their adult children are sometimes stymied by those very heirs when it comes to structuring the assets.
For instance, a parent with three grown children may desire to leave the same amounts to each child. Two of the three are responsible, hard-working and fiscally conservative with funds. The third struggles to maintain steady employment, has had a few brushes with the law and filed twice for Chapter 7 bankruptcy over the past few decades.
The elderly parent is concerned with how the third child would (mis)manage the assets that he or she inherits and likely would blow through the bulk of the money within the first couple of years. Yet Mom or Dad doesn’t want to leave this individual less than his or her two siblings.
Scenarios such as the above can be satisfactorily resolved with the establishment of an irrevocable spendthrift trust for the adult child who has proven unable to successfully manage his or her finances.
Spendthrift trusts protect in two ways. First, they preserve assets that an irresponsible heir would otherwise blow through hastily, leaving nothing for the future and potentially becoming a burden on any siblings. But the individual’s needs will continue to be met by a series of periodic installment payments out of the trust’s assets, which cannot be sold, transferred, pledged or otherwise assigned by the heir.
A spendthrift trust also protects the trust’s assets from any creditors the beneficiary may acquire through debts. It’s a good way to protect assets from being seized as a result of a monetary judgment against the beneficiary. However, certain debts may not be protected by a spendthrift trust, namely child support, alimony and potentially outstanding taxes owed to the Internal Revenue Service.
To learn if this type of trust is a good fit for you, discuss its merits with your estate planning attorney.
Source: EstatePlanners.com, “What is a Spendthrift Trust?,” accessed Aug. 11, 2017