A spendthrift trust is typically used to prevent a beneficiary from receiving an inheritance all at once. Why would a grantor (the person creating the trust) want to consider such an approach? The most obvious reason is that the grantor believes his or her beneficiary is a “spendthrift” and will quickly squander the inheritance.
There are other reasons to consider a spendthrift trust, including:
- The beneficiary (or the beneficiary’s spouse) has so many debts that the inheritance could be lost to creditors
- The beneficiary’s marriage seems likely to end in divorce
- The beneficiary’s friends are spendthrifts and seem to have undue influence over the beneficiary’s behavior
- The beneficiary suffers from personal problems such as alcohol or drug addiction
In these and other situations, a spendthrift trust protects the beneficiary’s inheritance because the beneficiary cannot directly access the assets in the trust. Therefore, creditors and other “threats” cannot reach the trust’s assets either. Also, since the beneficiary’s inheritance can be distributed in specified amounts over time, the entire inheritance cannot be lost all at once. (Of course, the portion that is distributed would be vulnerable unless other protective tools are employed.)
As with all trusts, it is crucial to choose one’s trustee carefully because the terms of the spendthrift trust give the trustee control over trust assets and their distribution to the beneficiary. Similarly, it is essential that the trust outlines the trustee’s authority in great detail.
A key component in deciding who to choose as trustee is the preservation of family relationships. For example, if you name one sibling as trustee of the other sibling’s spendthrift trust, and the trustee needs to refuse the beneficiary’s requests for money, or fend off the beneficiary’s creditors – will their relationship be able to withstand that?
Likewise, the decision to serve as trustee should not be taken lightly. Is the trustee willing to do the ongoing work? Will she fear that her role as gatekeeper will damage her relationship with the beneficiary? Furthermore, the trustee can be held financially and legally responsible for failing to follow trust directives.
If you want to leave a loved one an inheritance but are concerned about his or her ability to manage it, I can help you determine whether a spendthrift trust is right for you.
Until next time, take care….
Alexis