When planning their estates, many people struggle with how to handle inheritances for certain beneficiaries. They worry that some heirs have not been responsible with money or assets in the past, and fear leaving them resources that could harm rather than help.
Protecting beneficiaries and others
When a beneficiary faces addiction, compulsive spending, severe debt or other vulnerabilities, grantors may limit direct access to an inheritance to protect both the beneficiary and the estate while still providing support. In these circumstances, funding a spendthrift trust can make good sense.
Sometimes, the fault lays not with the beneficiary but with that person’s spouse. Although inherited funds are technically the property of the beneficiary, they may be easily manipulated or even physically bullied into giving their spouse access to the trust’s principal.
That can drain a trust designed to last a lifetime in just a few short years.
Beneficiaries in some professions can benefit, too
In some cases, the character and money-management skills of the beneficiary and any spouse are not a concern to the trust grantor. In fact, it might be the beneficiaries’ chosen career that gives the trust grantor pause.
For instance, those who go into some industries and careers are far more likely to become defendants in a lawsuit. Attorneys, health care professionals, celebrities and others who have high-profile careers are more likely to be perceived as having deep pockets to settle lawsuits. Holding assets in spendthrift trusts protects the principal from being attacked by defendants and/or beneficiaries’ creditors.
Are there any negatives associated with spendthrift trusts?
There can be. Some beneficiaries chafe at the restrictions the trust grantor places on their access to the funds. They can perceive this as a form of dead-hand control from beyond the grave. They are entitled to their opinions and are always free to refuse any disbursements.
Trust grantors set the terms of the trusts
They not only fund these trusts but appoint the trustees that administer them and set the frequency and amount of the disbursements. They can even choose to link disbursements to life achievements like college graduations, marriages and childbirth.
Ultimately, a well‑drafted spendthrift trust can preserve a lifetime of savings from creditors, lawsuits, and poor financial choices while still providing meaningful, controlled support to your heirs. Consulting an attorney can help you determine if it is a good fit for your situation.
