There are times when you want to take care of your children in your will, but you know they would blow through their inheritance in just a few years. That’s when a spendthrift trust comes in handy. Also called a spendthrift provision, this type of trust has restrictions that protect immature heirs from both themselves and potential creditors.
[See: 10 Tax Breaks for People Over 50.]
What Is a Spendthrift Trust?
A spendthrift trust allows you to leave funds to a beneficiary without giving them full control over those funds. Instead, an independent trustee is given the authority to distribute funds for the benefit of a beneficiary. “A spendthrift trust is basically set up to protect your beneficiary from squandering the wealth that was bequeathed to them or was left to them,” says Sabine Franco, chief esquire of The Ambitious Legacy Firm in Hempstead, New York. “Basically, it prevents waste or injury to an immature heir, so that they don’t lose the inheritance, and it also protects them from being taken advantage of from others.”
[See: How to Pay Less Tax on Retirement Account Withdrawals.]
How to Set Up a Spendthrift Trust
Sit down with an estate attorney and talk in detail about your concerns. The attorney can write into the trust certain rules. For example, an heir may be required to reach a certain age before they start receiving payments, or you might require that the heir receive installments at certain life stages. “It’s really about evaluating the particulars of their life, their loved ones, their assets, and then coming up with a plan on how to distribute the assets and when that should be done,” Franco says.
For example, if the parents have a $10 million estate, they may want to make sure their 18- and 20-year-old children are taken care of, but they don’t want them to get $5 million each all at once. They can create a spendthrift trust (or a spendthrift provision) that might say the children will receive the first payments when they graduate college, and later payments when they marry, have children or even buy a home. The concern could also be to protect immature heirs from others, especially creditors.
How to Decide if a Spendthrift Trust Is Right For You
If you have an heir or someone you want to leave an inheritance to who is immature, irresponsible or underage, a spendthrift trust can give you some control over how and when the money is spent.
A spendthrift provision can also try to limit access to the funds by creditors. “The goal is to keep other people from accessing the funds,” says Jennifer Belmont Jennings, a senior wealth advisor at Hightower Wealth Advisors in St. Louis. “It’s the goal of the original trust creator to protect their beneficiary’s assets from other people. It could be a creditor or even an ex-spouse.”
The laws regarding spendthrift trusts vary from state to state. “The ability of a creditor to be able to get access to those assets is going to depend on state law,” Jennings says. “Every state has different rules around their respect for the spendthrift provision.”
One of the keys to setting up a successful spendthrift trust is the person you select to be the trustee of the funds. That person can have some discretion when distributing the funds, so it needs to be someone you can trust over the long term. “That’s why going to an estate planning attorney who truly is an expert in that field is so important,” Jennings says. “You want to go to an estate planning attorney who does this for a living, who deals with high net worth clients, who deals with drafting these provisions and is familiar with the state law.”
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What Is a Spendthrift Trust? originally appeared on usnews.com
