It’s unfortunate, but clients who meet with me to do their estate planning will sometimes mention that one or more of their children is somewhat of a liability for one reason or another. You see it and hear about it all the time, a troubled youth or just a child who has no idea how to manage their affairs. Often, parents still want to include these children in their wills, but they fear what may happen when the children do get the money. The answer: A spendthrift trust.
Using such a trust as a component of your estate planning is generally a wise approach when a child (or any beneficiary who is not a child) is in one or more of the following circumstances: If the child…
- Is irresponsible with money management, does not have a history of saving and investing, and there is a concern that your hard-earned estate will be wasted;
- Has a history of creditor problems, actually has current creditor problems, or you are reasonably certain that creditor issues will arise in the future based on the child’s behavior;
- Is in an unstable marriage where a divorce is more than likely…the trust can prevent the estate from becoming part of a divorce settlement process;
- Is addicted to drugs, alcohol or gambling;
- Has a history of being influenced by an overbearing spouse in regards to money management;
- Belongs to a religious group or some similar organization and you do not want some/all of your estate to ultimately be donated to such a group;
- Would be prone to “financial predators” and scam artists.
What is a spendthrift trust?
A spendthrift trust is a trust usually established with the object of providing a fund for the maintenance of another person, known as the spendthrift, while also protecting the trust against the beneficiary’s imprudence, extravagance, and inability to manage financial affairs.
For example, a settlor establishes a spendthrift trust for his son, a compulsive gambler, who spends money injudiciously with no concern for the future. Under the terms of the $400,000 trust, which is to be administered by the family’s lawyer, the son is to receive $15,000 a year. Any words that indicate the settlor’s intention to impose a direct restraint on the transferability of the beneficiary’s interest can be used to create a spendthrift trust.
Such trusts do not limit the rights of the spendthrift’s creditors to the property after it is received by the beneficiary from the trustee (one appointed or required by law to execute a trust). The creditors cannot compel the trustee to pay them directly. This means that any of the spendthrift’s creditors can seek to have the money the spendthrift has already received applied to satisfy their claims. A creditor’s claims to future payments under the trust, however, are restrained.
The spendthrift’s creditors cannot reach the $15,000 that he is to be paid in a subsequent year until it is actually paid out to him. If such a person could dispose of his right to receive income from the trust, his incompetence or carelessness might lead him to anticipate his income and transfer to monetary lenders and creditors the right to receive future income as it became due. By restricting the spendthrift so that he can do nothing with the income until it is paid into his hands by the trustee, he is more likely to be protected, at least to some extent, against impoverishment.
Please note that this is not always the best approach, but those of you in a situation such as this should discuss this issue with an estate planning attorney. Otherwise, your child’s inheritance may tragically disappear…and perhaps make your child’s problem worse. If you have any questions of spendthrift trusts, or are looking for an attorney to plan your estate, call the experience estate planning lawyers of Maya Murphy, P.C. today at 203-221-3100.