Sure, you love your family. You want to provide for them and make sure they are taken care of after you are gone.
But that doesn’t mean you have to trust your loved ones to be wise money managers.
Some people simply aren’t good with money. Some have had bad breaks in their lives and spend their time fending off creditors. You do all you can to support them while you can, but who is going to make sure their money is spent properly once you’re gone?
You’ve worked hard to accumulate your wealth so it makes sense that you would want to ensure that the assets you leave to your loved ones won’t be blown in one crazy weekend in Vegas.
If this sounds like you, then a Spendthrift Trust may be your optimal estate planning tool.
A spendthrift trust is a trust set up to provide for a beneficiary (or beneficiaries) who often is unable to control his or her spending or manage money. The control of the distribution of assets contained in the trust is preferably given to an independent trustee who will maintain the authority to decide how the trust funds should be spent in order to best provide for the beneficiaries. The funds receive excellent protection from the creditors of the beneficiaries.
In order to qualify as a spendthrift trust, the trust must include specific language that states the creator of the trust intended it to be used as a spendthrift. This is called a spendthrift clause or provision. The details of each spendthrift trust can vary and should specifically define the exact powers/control that the trustee will have.
There are many situations that could call for a spendthrift trust. For example, you may want to leave money to loved ones with past drug/alcohol habits or gambling problems. Perhaps your loved one is gullible and has a high potential for being tricked or defrauded out of their money. Maybe you fear that the beneficiary of your wealth could be at risk for debt issues. Or, quite commonly, you have concerns about a present or future son- or daughter-in-law. All of these scenarios provide valid reasons for creating a spendthrift trust.
An important consideration for a spendthrift trust is choosing the right trustee. You need to pick someone you can implicitly trust to carry out your instructions, and be very aware of the situation you are putting them in. A spendthrift trust could become a major burden for your trustee if they are turned into a glorified babysitter for your beneficiary. It’s essential that you choose a trustee that is up for the task and create very clear and detailed instructions for them to follow in the administration of the spendthrift trust. In many cases, it makes sense to hire a professional trustee to fill this role.
Additionally, you’ll need to think about when you want the trust to end, plan for providing the beneficiary with the ability to make large purchases like buying a home or paying for college, and plan for changes in the beneficiary’s status. For example, what happens to the spendthrift trust funds if your beneficiary dies?
There is a lot to consider when thinking about creating a spendthrift trust, but it can be an invaluable tool in providing for the future of your loved ones with less than stellar financial skills. If you’d like to learn more about spendthrift trusts or are interested in starting one, call The Law Offices of John Mangan to discuss your options.