As you weigh your options for estate planning, one topic that frequently arises during these discussions is funding a trust. There are all sorts of trusts set up for various purposes, but today we will focus on one type of trust.
A spendthrift trust can be a useful tool in the estate planning toolbox, but it has both potential benefits and perils. Let’s delve deeper into the matter to help you make informed estate planning decisions.
What a spendthrift trust does
The trust grantor (you) funds this type of trust to preserve the trust principal and keep it from being depleted by either the beneficiaries themselves, their spouses or future creditors. A trustee is responsible for the management of the trust and will also periodically disburse funds to your chosen beneficiaries according to your instructions.
Why it could work
You know your children and grandchildren. You know which ones could handle a large sum of money as a behest and which might be literally undone by unfettered access to cash. For the latter group (or those who have shaky marriages and greedy spouses or whose professions leave them liable to lawsuits), a spendthrift trust can allow them to live comfortably without risking their inheritance.
And why it might backfire
Beneficiaries of spendthrift trusts may chafe at the restrictions placed on them, especially if those same conditions aren’t imposed on all other heirs. They could perceive it as your attempt to control them from beyond the grave.
Nevertheless, this is your money and you are entitled to do with it as you choose. If you do fund a spendthrift trust for some beneficiaries, it is usually unwise to name another relative as trustee over the trust. This can foment bad blood between siblings and adult children and their parents.
Your estate planning attorney can suggest an unrelated third-party trustee who can take over the trust management after you pass. Early consultation may help give you new insights and direction.