Protecting your children from frittering away an inheritance is often done through a spendthrift trust, but that trust can also be used to protect them from divorce and other problems that can come their way, according to Kiplinger in “How to Keep Your Heirs from Blowing Their Inheritance.”
We all want the best for our kids, and if we’ve been fortunate, we are happy to leave them with a nice inheritance that makes for a better life. However, regardless of how old they are, we know our children best and what they are capable of. Some adults are simply not prepared to handle a significant inheritance. They may have never learned how to manage money or may be involved with a significant other who you fear may not have their best interests in mind. If there’s a problem with drug or alcohol use, or if they are not ready for the responsibility that comes with a big inheritance, there are steps you can take to help them.
Don’t feel bad if your children aren’t ready for an inheritance. How many stories do we read about lottery winners who go through all their winnings and end up filing for bankruptcy?
An inheritance of any size needs to be managed with care.
Within a Living Trust or a Will, you can create a Trust to control how and when funds become available to spend. This type of trust is a “Spendthrift Trust,” and it protects beneficiaries by providing a trustee with the authority to control how the beneficiary can use the funds. A trust is a spendthrift trust when the estate planning attorney who creates it uses specific language indicating that the trust qualifies as such and by including limitations to the beneficiary’s control of the funds.
A spendthrift trust also protects assets from creditors because the heir does not own the assets. The trust owns the assets. This also protects the assets from divorces, lawsuits, and bankruptcies. It’s a good way to keep the money out of the hands of manipulative partners, family members, and friends.
Once the money is paid from the trust, the protections are gone. However, while the money is in the trust, it enjoys protection.
The trustee in a spendthrift trust has a level of control that is granted by you, the grantor of the trust. You can stipulate that the trustee is to make a set payment to the beneficiary every month or that the trustee decides how much money the beneficiary receives.
For instance, if the money is to be used to pay college tuition, the trustee can write a check for tuition payments every semester, or they can put conditions on the heir’s academic performance and only pay the tuition if those conditions are met.
For a spendthrift trust, carefully consider who might be able to take on this task. Be realistic about your family dynamics. Having one child handle the funds for another can cause tensions and resentments that can easily be avoided. An aunt, uncle, family friend, professional firm, bank, or investment company may be a better, less emotionally involved trustee than a sibling.
An estate planning attorney can advise you on creating a spendthrift Trust plan that fits your unique circumstances.
Reference: Kiplinger (June 5, 2019) “How to Keep Your Heirs from Blowing Their Inheritance.”