Through the ups and downs of their lives from childhood to adulthood, you have always loved your children. Along the way, though, you questioned some of the financial decisions they made, making you think carefully as you created an estate plan.
If thrust in such a situation, it may be a good idea to create a spendthrift trust, which is a “safety mechanism” within an estate plan. A spendthrift trust protects a beneficiary’s inheritance from creditors and, just as importantly, from the beneficiaries themselves.
Protects assets from creditors, too
Say a person creates a $1 million trust for an adult child, who receives $50,000 in annual distributions from the spendthrift trust. If that adult child falls into significant debt, creditors may only collect on the $50,000 distribution and not the entire trust itself.
In addition, the trustee – the person who oversees and monitors the trust – has the discretion when distributions get made to a financially irresponsible beneficiary. For example, an instruction could be to cease distributions to the beneficiary if he or she develops a gambling or substance abuse problem.
A trust that lives on after your death
A key difference between an irrevocable trust and other trusts is that the former lives on past the death of the grantor – the person who created the trust. Thus, assets remain in a spendthrift trust after the grantor’s death. In other trusts, when the grantor dies that trust ceases to function, and the trustee distributes all remaining assets.
A spendthrift trust may give you the peace of mind you seek, knowing that your estate remains protected for a long time. Some beneficiaries may be upset and find your decision difficult to swallow, but deep down, they know that you are always looking out for their best interests.