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Spendthrift Trusts not Just for the Wealthy

Research tends to show that people who come into large sums of money often burn through it pretty quickly. Consider these examples of people who won millions only to have their lives completely deteriorate. From drugs and lavish lifestyles to reckless gambling and ruined marriages, new money can be a very dangerous thing to those who do not know how to manage it.

Perhaps you have enjoyed a relatively successful life, earning more than average income and making solid financial decisions. You tirelessly saved your money and invested conservatively for decades. Now, as you enjoy your retirement, your children and grandchildren may not share the same views on prudent financial planning. Perhaps more than one of your heirs is a bit too free with his or her money and always seems to be in dire straits. This may have you concerned about what will happen should they inherit a large sum of money. You may have heard that spendthrift trusts are just a tool the super wealthy use to protect their kids. But they are really much more than that, and such provisions can be part of anyone’s estate plan.

What is a spendthrift trust?

The term “spendthrift trust” is really kind of a misnomer. It is actually more of a provision that one puts into a trust. A trust is a contract between the settlor (person who funds it) and the other parties. Other parties include a trustee (the person who manages the trust) and the beneficiaries (people who stand to benefit from it). Some trusts are self-settled, meaning the person who puts assets in the trust is also the primary beneficiary. The settlor (also called a trustor) can also choose to serve as his or her own trustee.

Others are settled by a third party. In those cases, one person puts assets into a trust for someone else’s benefit. These are sometimes used to provide for a disabled relative. As you can see, there are a lot of different ways a trust can be established. A spendthrift provision contemplates the possibility that one or more of the intended beneficiaries of the trust might squander or otherwise lose the money given to them through the trust. The provision sets forth a mechanism for protecting the beneficiary’s interests with or without their permission. Such a provision can be placed in almost any type of trust.

What can a spendthrift provision do?

Like all trust provisions, the spendthrift provision has certain benefits and limitations. Here are just a few of the ways a spendthrift provision can help:

  • Control. You get to control, at least to some degree, the behavior of your chosen heirs for long after you have passed away. Although this may seem harsh, just remember that your values and judgment were what achieved your lifetime earnings. A probate judge 10 years from now may not see gambling or a wild lifestyle as a problem. Do you really want your grandchildren inheriting $100,000 if they have a drug habit?
  • Protect your heirs: If a creditor comes after your heir for unpaid debts, their inheritance is fair game. Say your adult son or daughter inherits $100,000 through a simple will. At the moment of your debt, that entire amount becomes the sole property of your child. The next day, a creditor could obtain a judgment and recover that money. Further, consider if your heir is at fault in a fatal car accident shortly after inheriting the money, if insurance is not sufficient to cover the injuries, the other party could possibly sue your heir and get a judgment, thereby coming after the inheritance they just received. In short, the spendthrift provision does not mean you dislike or distrust your heir; it means you want to protect their inheritance against potential debtors.
  • Protect the trust. Beyond protecting your potentially wasteful heir, a spendthrift provision can also protect the total trust (called the trust corpus) from depletion. Should there indeed be an heir with a drug, alcohol, gambling, or other spendthrift lifestyle, they subject the whole trust to risks. Poorly drafted trusts have been broken and depleted to pay for the debts of a single beneficiary. Imagine leaving $1 million to three adult children, only to have one child’s creditors attach a lien on the entire trust. This has happened more than a few times. Therefore, establishing a spendthrift provision ensures the other heirs will still be able to enjoy the balance of the trust despite one careless beneficiary.

How to create a spendthrift trust

These provisions are relatively straightforward and can be incorporated into most estate plans. However, they may not be appropriate for all clients. To find out for sure, contact an experienced Florida elder law attorney. With three offices throughout The Villages, The Millhorn Elder Law Planning Group advises seniors on estate planning and long-term care planning.

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