|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.