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A Spendthrift Trust: A Solution For A Troubled Heir

14 April 2018

Arthur Young

Are you worried about what's going to happen to your heir after you are gone? It's a natural concern -- but some parents have extra reasons to worry, especially when a child has a history of problems that can lead to financial woes. A spendthrift trust is a potential solution to your worries. Here are a few things to consider.

Who does a spendthrift trust protect?

A gambling addiction, a substance-abuse problem, a history of shopping their way into piles of debt, and even an unstable marriage can put an heir's entire inheritance at risk. In other cases, simple youth and naivete can be a danger when someone inexperienced with wealth is suddenly handed a fortune. They can easily fall prey to a lot of "friends" with empty pockets. A spendthrift trust can protect a beneficiary against the loss of assets in a divorce, from creditors (even in bankruptcy), and from their own misguided impulses.

How do these kinds of trusts work?

When you set up a spendthrift trust, you name a trustee to disburse the funds to your heir according to whatever provisions are named in the trust. You can arrange for monthly or yearly disbursements to make sure that your heir has all the necessary money for his or her living expenses. Often, trustees are given broad discretion when it comes to making extra disbursements for true needs -- like educational costs, medical expenses, or even the money for a home.

You can also set up the trust in one of several ways. It can stay in effect for the beneficiary's entire lifetime and even pass to his or her heirs. You can also set the trust up so that it disburses the principal in manageable segments. For example, in addition to paying a monthly stipend, you can arrange for larger payments to go out on your heir's 23rd, 30th, 35th, and 40th birthdays. Having the bulk of a large estate broken down like that can ease your heir into the process of managing his or her wealth -- and provide a fallback if things go badly the first time. 

How else can one of these trusts help with a troubled heir?

One option you have with a spendthrift trust is how a beneficiary's expenses are paid. You can arrange it so that all his or her living expenses are paid directly by the trustee -- instead of handing your heir the money on a monthly or yearly basis. This is particularly useful if your heir has a vice, like a drug addiction or gambling, and you're worried that he or she will divert the rent money that way.

If you're interested in discussing a spendthrift trust, talk to an attorney near you as soon as possible. For more information, contact a law office like Barrett Twomey Broom Hughes & Hoke LLP.

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