You have worked hard to build financial stability for your family. As you contemplate passing your assets to your children or even grandchildren, you may have concerns about their ability to properly manage an inheritance, or that circumstances might take away their newly acquired assets.
Creating a will may not offer enough latitude to ensure your descendants do not lose or squander your wealth. Fortunately, you may consider creating a trust. Specifically, a spendthrift trust offers a solution to ensure your assets are used responsibly.
What is a spendthrift trust?
With this type of trust, you have the power to set terms to restrict access to the trust assets by your beneficiaries. Instead of obtaining a lump sum inheritance, your beneficiary receives incremental payments from the trustee according to your specified schedule and conditions. This protects the trust funds from rapid depletion and provides a steady stream of income.
What are the components of this trust?
At its core, a spendthrift trust involves three key parties. One is the grantor who creates and funds the trust. The second is the person or individuals who receive payments from the trust. Finally, there is the trustee who manages and distributes the assets.
As the grantor, you establish how your beneficiaries receive trust payments. You can determine when, how much, and under what circumstances your trustee will provide payments to whoever you want to receive from the trust.
What situations can a spendthrift trust address?
Spendthrift trusts serve various purposes depending on your concerns. If a beneficiary struggles with financial impulsivity, addiction issues or creditor problems, the trust prevents them from accessing and quickly exhausting their inheritance. For minor beneficiaries, the trust ensures the proper management of trust funds until adulthood. Spendthrift trusts even offer asset protection from lawsuits in certain situations.
While a spendthrift trust offers protection on multiple levels, it is not without drawbacks. Like any trust, you will have upfront costs of establishing the trust. Also a spendthrift trust is irrevocable. This means you cannot change or abolish the trust after creating it.
Ultimately, a spendthrift trust balances providing for your beneficiaries while responsibly preserving your legacy. Carefully consider if this estate planning tool aligns with your goals for passing wealth to the next generation.