Not everyone manages money well, and life can create challenges even for responsible people. If you plan to leave a legacy for your loved ones, you may be looking for ways to help it last over time. A spendthrift trust is one option that may help beneficiaries manage an inheritance more effectively. Here's what to consider.
Spendthrift Trust Defined
A spendthrift trust, sometimes called an asset protection trust, is designed to help preserve assets for beneficiaries who may be at risk of spending money too quickly.
These trusts can:
- Help limit overspending by restricting direct access to funds
- Offer some protection from external creditors
The Role of the Trustee
A trustee manages withdrawals from a spendthrift trust. This adds a layer between the beneficiary and the trust assets, instead of giving full access to the funds. The trustee must follow the terms of the trust and applicable laws.
Depending on how the trust is set up, the trustee may control how much is distributed and when. For example:
- The trustee may give funds directly to the beneficiary for general use.
- The trustee may pay expenses directly, such as tuition or housing.
Working with an estate planning attorney can help clarify what options are available and what may fit your situation.
Situations When a Spendthrift Trust May Help
A spendthrift trust may be useful in several scenarios.
The Beneficiary May Struggle With Money Management
This is a common reason to set up this type of trust. A beneficiary may be young, have a history of poor financial decisions, or face challenges such as substance abuse.
In some cases, individuals may also be overly generous, which can make them more vulnerable. Having a trustee oversee distributions may help the funds last longer.
Creditors
If a beneficiary owes money, creditors may try to access their inheritance. A spendthrift provision can limit or prevent access to those funds. This may also apply if the beneficiary faces a lawsuit after an unexpected event.
Divorce
If a beneficiary divorces after receiving an inheritance, an ex-spouse may attempt to claim a portion of those assets. While outcomes vary, a spendthrift trust may help reduce what can be claimed.
Potential Limitations of a Spendthrift Trust
A spendthrift trust is not effective in every situation. State laws and individual circumstances play a role, so legal guidance is important.
In some cases, these trusts may not protect assets from:
- Child support obligations
- Certain legal claims
The Bottom Line
A spendthrift trust can help protect an inheritance and guide how funds are distributed. It may be helpful when a beneficiary is likely to spend money in a way that reduces long-term value.
Setting up a trust can be complex and may involve difficult decisions, such as:
- What rules the trustee should follow
- How much discretion the trustee should have
- Who should serve as trustee
To understand how these strategies may apply to your situation, consider speaking with an estate planning attorney licensed in your state. They can explain how state laws, your assets, and your goals may affect your options, and answer any questions about how a spendthrift trust works.
