Trusts are useful tools for estate planning purposes. They can take various forms that best address the wishes of the trust grantors and the needs of the beneficiaries. One type of trust you might want to consider for one or more of your heirs is a spendthrift trust.
Why might you choose this type of trust? There is the most obvious reason as reflected by the trust’s name – spendthrift. Your heir may be unable to successfully manage a substantial sum of money after you have passed. Learn how you might be able to protect them from making some devastating financial decisions about the inheritance you leave them
There is a buffer between the heir and the trust’s principal
Unlike in some other types of trusts, the beneficiaries of a spendthrift trust never have unfettered access to the funds. Rather, a trustee whom you name doles out the money in increments according to the disbursement schedule you devise.
Spendthrift trusts can be your way of assuring that a much loved but perhaps irresponsible beneficiary continues to have access to the funds for the rest of their lives (or an extended period). If you have a beneficiary who struggles with drug and alcohol problems, this can be a safety net to deter their worst impulses.
Another reason to set up a spendthrift trust
Creditors cannot gain access to the principal of a spendthrift trust fund. Neither can ex-spouses divert these income streams if a marriage ends in divorce. If your heir injures someone in an auto accident, the injured party has no right to these funds to satisfy a judgment against your loved one. The funds also can’t be siphoned off in a bankruptcy filing.
Not all trust grantors need to fund spendthrift trusts, but they remain useful alternatives to consider when managing your estate plan.