When doing your estate planning, your legal and financial advisers might recommend trusts as a vehicle to convey money or assets to your heirs. One type of trust can be specifically drafted to prohibit heirs’ access to the trust principal and from bleeding it dry with disbursements.
Spendthrift trusts can be quite useful when one or more of your heirs is irresponsible with money or struggles with substance abuse or gambling problems. Below are some common questions to help you learn more about this kind of trust for your heirs.
How do spendthrift trusts protect assets?
Instead of a beneficiary having unfettered access to the trust and its principal, the funds are managed and disbursed by a trustee appointed by the trust grantor (you) during their lifetime.
Can these restrictions be challenged?
A beneficiary could try to change the provisions of a spendthrift trust but that is no guarantee they will succeed. A trust grantor could also include terms stating that anyone who challenges the provisions would be barred from receiving disbursements.
Who may need a spendthrift trust?
These trusts are not just for fiscally irresponsible beneficiaries. If your beneficiary is married to someone who controls the purse strings, this is puts a layer of security between the spouse and your beneficiary’s inheritance.
Also, someone who is susceptible to lawsuits (doctors, attorneys, etc.) could benefit from a spendthrift trust because those funds and resources aren’t accessible to litigants or creditors.
Are there any drawbacks to spendthrift trusts?
Possibly. Some beneficiaries view them as a deceased relative’s attempt to exert “dead-hand control” over their lives. They can also cause discord between relatives if one party is the trustee over a sibling’s, child’s or parent’s money.
Learning more about spendthrift trusts allows you to fully explore your estate planning options before choosing which works best for you and your heirs.