Spendthrift trusts provide needed protection for beneficiaries

On Behalf of | Feb 8, 2022 | Estate Planning

As you complete your estate plan, a thorny issue sometimes arises. One or more of your potential beneficiaries has proven to be ill-equipped at money management. This presents a major dilemma for those trying to make prudent estate planning decisions.

You don’t want to leave a loved one out of your estate plans. But you worry that unfettered access to a large sum of money could prove to be their undoing.

What are your options?

In these circumstances, your estate planning professional is likely to recommend a spendthrift trust. This type of trust can protect your beneficiary from their worst impulses. It’s particularly effective if your loved one struggles with substance abuse, gambles to excess or has difficulty keeping their compulsive shopping tendencies in check.

Other situations that call for this protection

Even if your loved one is challenged by none of the above issues, they still might benefit from the protections provided by a spendthrift trust. Sometimes, a beneficiary’s spouse might exert pressure on them to dissipate the trust’s funds to meet the spouse’s perceived needs. Or, one or more of your beneficiaries could be a bankruptcy risk or work in a profession like medicine or law where malpractice claims could wipe out their inheritance.

How spendthrift trusts work

Instead of having access to the trust’s principal, your beneficiaries receive regular disbursements from the trustee you appoint to manage the trust. It’s usually wiser to avoid naming siblings, parents or adult children as the trustee of their relative’s funds in the spendthrift trust. Such arrangements can complicate formerly congenial relationships, so to avoid this, choose a financial adviser or estate planning professional as trustee instead of a relative.