Some families have members who are more prone to spending recklessly than others. If that sounds familiar to you, you may want to consider how that will impact your estate plan. This could include placing restrictions on spending and the distribution of assets so that they cannot be as easily spent on inconsequential things or taken in a credit dispute, lawsuit, or divorce. A spendthrift trust is one option to accomplish this.
When should you consider implementing a spendthrift trust as part of your estate plan? These guidelines can help you decide if this type of trust is a good fit for your loved ones and your estate.
What is a Spendthrift Trust?
Do you have any spendthrifts in your life? These individuals are often reckless spenders and may accrue a tremendous amount of debt over time. This makes them poor candidates to receive a lump sum payment from your estate, since they may quickly burn through the wealth you worked so hard to build.
Despite their spending habits, you still care about them and want to include them in your estate. Fortunately, there’s a solution that can prevent them from wasting your gift.
A spendthrift trust is a powerful tool to ensure your beneficiaries cannot squander the financial gift that you want to give them. If you have a loved one who is impulsive and spends money with no thought of the repercussions, you can still give them a trust. The key is that they must meet all of the conditions you set forth to receive those assets.
For example, you could prevent them from receiving a lump sum payment and instead parcel the funds out over the course of several years. You can create provisions for emergencies, all while protecting the assets in the trust from creditors. All of this is done upon creation of the trust and can be explained to your beneficiary upfront (if you so choose).
Is a Spendthrift Trust Good for Estate Planning?
Maybe you’re worried about how your estate will be handled after your passing. Trusts can be powerful tools to ensure that your loved ones have what they need while still setting any necessary guardrails on how and when your assets are distributed.
In particular, a spendthrift trust provides protection for the things you worked hard to pass on to the next generation. It serves as a form of protection for all parties, including yourself.
Trusts are great tools for estate planning because they permit you to remove assets from your estate, thereby bypassing the probate process. They also provide for your loved one, albeit from a more controlled process. As the grantor, you get to set the terms for your beneficiaries with the help of a trustee who will ultimately manage it and see that your wishes are carried out.
Pros of a Spendthrift Trust
Spendthrift trusts come with some inherent advantages that you may want to consider before you reach out to a trustee to help you draft the documents.
Here are some of the benefits for you and your beneficiary:
Protection for your assets: If you worry that your loved one may fall into debt or be the victim in an expensive lawsuit, a spendthrift trust protects your assets. Those assets cannot be seized in an extenuating circumstance such as a legal judgment or bankruptcy. It protects the financial benefit for your beneficiary.
Improved financial management: When a loved one has a habit of reckless spending, this type of trust can help them better manage a windfall of cash. You get to dictate how much they receive and when they receive it, encouraging them to have better financial management over a lifetime.
Privacy: Your will and testament are public knowledge, especially as it makes its way through the probate process. Trusts are separate from your estate, do not go through probate, and are a way to ensure that your loved ones have some privacy and confidentiality.
Cons of a Spendthrift Trust
Of course, not everything about your spendthrift trust is going to be positive. Here are some of the downsides to consider before drafting your documents:
Limited control for loved ones: This is a double-edged sword. You want your beneficiaries to have the financial help they need after your passing, but you do not want them to have full control. To some, this limited control over the assets in the trust (which are entrusted to a trustee over your beneficiaries) can feel restrictive. You must remember that it is exactly this limited control that provides them with protection.
More expensive to maintain and set up: A spendthrift trust comes with inherent setup fees and administrative fees for its long-term maintenance. Anything you spend to maintain a relationship with your trustee can reduce the value of the estate. Setup can be complex, so you should consider enlisting the help of qualified professionals. It can’t hurt to shop around, too, as the fees at some institutions, especially banks, can be quite high.
Restrictions: The hallmark of a spendthrift trust is that your beneficiary will not receive lump sum payments from your estate. These restrictions can lead to frustration for some beneficiaries who may find themselves in need of cash flow. Some beneficiaries can be their own worst enemies, and somehow, they usually find some friends to help out.
Get Advice from Qualified Professionals
Do you have a loved one in your life who might be considered a spendthrift? Magellan can help you establish a spendthrift trust that passes financial benefits onto them while ensuring that they cannot squander their inheritance. We offer comprehensive estate, financial, tax, and legal planning and can act as the trustee on your spendthrift trust.
Reach out to us today to learn more about how we can help you establish the right type of trust for your loved ones to benefit in the years and decades to come!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.