When parents and grandparents devise estate plans in order to leave their beneficiaries legacies, sometimes their estate planning attorneys may recommend establishing something called a spendthrift trust for one or more heirs. But what are these trusts, and for whom are they ideal?
Spendthrift trusts are handy deterrents that can save an heir from financial disaster. While not every heir will benefit from such a trust, the ones who need them in most cases need them desperately.
The trusts serve the dual purpose of protecting the bulk of the trust from an irresponsible heir as well as from creditors that might pursue the heir for unpaid accounts.
Spendthrift trusts differ from conventional trust funds as the assets are controlled by trustees who oversee and manage the investments by and distributions from the trusts. Beneficiaries don’t have access to the principal and must have all payments and reimbursements approved first. Heirs also are prevented from accessing the trust’s assets and pledging them as collateral for dubious purchases, such as sports cars.
Quite understandably, many heirs chafe under such restrictions and may resent their benefactors for controlling them from beyond the grave by tightening the purse strings preemptively. However, the money and assets belong to those who establish these spendthrift trusts, who are, of course, free to set them up as they see fit.
It may help ease your mind to realize that creating a spendthrift trust is the only way that you can assure that your heirs will have a financial cushion to fall back on in years to come should they experience hard times. Your estate planning attorney can review your options and help you decide on the best course of action to take.
Source: The Balance, “How a Spendthrift Trust Can Protect Your Heirs from Themselves,” Joshua Kennon, accessed Oct. 06, 2017