No matter how much you try to guide your child, they cannot seem to pull it together when it comes to money. Nevertheless, you may want to include them in your will to make sure they are taken care of when the time comes. If you are concerned about your child squandering your life savings away, a spendthrift trust is one estate planning tool that can help you exert some control over their spending.
How does a spendthrift trust work?
You know your child best. If your child has a history of reckless spending, a spendthrift trust will restrict their ability to spend or move assets. In a spendthrift trust, you transfer assets into a trust fund, appoint an independent trustee to oversee it and name your child as the trust beneficiary.
The trustee has a legal responsibility to manage the trust fund for the beneficiary’s benefit. Rather than releasing funds in one lump sum, the trustee will distribute your child’s inheritance in increments. You can set the conditions under which your child will receive their inheritance.
You may consider the following uses of a spendthrift trust:
- Age-based trust: The trustee distributes assets only after a child reaches a certain age (usually when they are older and more responsible).
- Incentive trust: The beneficiary has to “earn” their inheritance by meeting the conditions you place in the trust. Your child’s inheritance, for instance, may be contingent on reaching particular life milestones such as graduating college, starting a family or earning a specific salary level.
- Annuities: Beneficiaries of annuities often receive payouts throughout their lifetimes or according to a payment schedule set by the grantor. It is a way to ensure the recipient has money to live on for the rest of their lives.
It can be difficult to figure out how to leave money to a financially irresponsible child. As much as you’d like to help them, it is incredibly challenging when they refuse to help themselves. If you are having trouble with estate planning, a neutral third party can give you an honest assessment of your situation and help you build the right plan.