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Courtesy of Ralf Roletschek |
If you have a family member who struggles with addiction,
gambling, a controlling spouse, a party lifestyle, or bad financial planning,
estate planning can be a dilemma. On one
hand, you may wish to provide the family member a share of your estate to show that
he or she is loved just the same as other members of the family. On the other hand, you worry that any
inheritance will end up in the hands of creditors, a manipulative partner, at
the casino, or fueling a drug addiction.
This post will discuss how spendthrift trusts are used to responsibly provide
for family members who may not be able to manage an outright inheritance:
In many wills or living trusts, all property destined for
adult family members is given outright, with no strings attached. It is often best for these adult family
members to receive the full share of the estate quickly, and with as little
hassle as possible. In fact, avoiding legaland administrative hurdles to speedy distribution of property is one of the
main reasons people hire estate planning attorneys. However, there are instances where you may
need to protect the ones you love from receiving too much money at once.
If you have a son who is in severe financial trouble, an
outright inheritance may simply be consumed in bankruptcy proceedings and end
up in the hands of creditors. Perhaps
you have a daughter recovering from a drug problem; a sudden influx of a hundred
thousand dollars may tempt her to revert to a dangerous habit. The best way to take care of children in
situations like these is often to ensure that they are provided a stream of financial
support when needed, but not given control over the management of their inheritance. The mechanism for doing this is a spendthrift
trust.
Let’s say in an ideal world, you would like to give your son
a stock portfolio, but cannot do that for the reasons above. In your estate plan, put the stock portfolio
into a spendthrift trust. After you die,
the trustee you named for the spendthrift trust will control the stock
portfolio for the benefit of your son. You
might name a family member, a financial institution (or both), or any other
trustworthy person or entity to serve as trustee. Importantly, creditors cannot reach the money
while it is still in the spendthrift trust because your son does not have the
power to withdraw funds from the trust himself.
The trustee is in control.
In this example, you would likely give specific instructions
to your trustee about when to distribute money to your son and for what
reasons. For example, you could leave
instructions for the trustee that he or she is to use the funds to buy food and
clothing for your son only. You may also
give the trustee discretion not to make distributions to your son, which may be
particularly desirable at times when creditors are likely to seize any property
that is distributed.
Some caveats: You
cannot create a spendthrift trust for the benefit of yourself, to avoid your
creditors. Also, spendthrift trusts add layers
of complication to an estate plan. Consider
carefully the consequences of tying up an inheritance for years after your
death. Talk to an estate planning
attorney if you think a spendthrift trust might be right for you.
Note: The information above is not legal advice and is not the basis of an attorney-client relationship. If you need assistance, you can hire an attorney to assist you with your individual legal needs.
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