The aging population is expected to transfer $30 trillion in the coming years, per Forbes. According to the Survey of Consumer Finances, the median inheritance is $69,000; the median for trust fund wealth transfers is $285,000.
Many individuals planning their legacies wish to provide for their families and loved ones. Yet an Ohio State University study determined that those who receive an inheritance spend half. One-third of those who received an inheritance spent it all within two years and had negative savings. That said, a typical inheritance may not provide sustained financial security to beneficiaries.
Creating a spendthrift trust for your loved one can limit their spending and your protect wealth. While this type of trust may come at the expense of their autonomy, it can provide them with greater financial security.
What Is a Spendthrift Trust?
A spendthrift trust protects beneficiaries who may need help managing their finances responsibly. The trust preserves the beneficiary’s inheritance for use over an extended period.
Spendthrift trusts work by giving a trustee, rather than the beneficiary, the power to make financial decisions. The trustee manages the trust assets and distributes funds to the beneficiary for their needs and support.
The trust’s terms outline the trustee’s discretion in making distributions, which can be limited or flexible. The creator of the trust, or grantor, may leave the timing and amount of distributions up to the trustee. Or, they may opt to establish a fixed schedule.
These restrictions prevent the beneficiary from squandering the assets.
The Spendthrift Clause
An essential feature of a spendthrift trust is the spendthrift clause, which protects the contents of the trust. Under the clause, the beneficiary cannot satisfy debts with their interest in the trust. Should the beneficiary have debts or a civil judgment against them, the creditors cannot obtain the trust assets.
Why Would Someone Create a Spendthrift Trust?
You may want to provide for a loved one but have concerns about who they will use the money. This is where a spendthrift trust can serve as a suitable option.
Spendthrift trusts can benefit the following individuals:
- Children – Parents often have concerns about how their minor and young adult children will use an inheritance. Minors typically need more life experience to make independent financial decisions. Some parents want to provide for college-age adult children but worry about giving them full access to the funds.
Parents can determine when their children receive the funds (for instance, when the child reaches a certain age).
- People who are not good with money – Some adults struggle with financial planning and impulse control. For these individuals, a spendthrift trust can ensure a steady source of support.
- Vulnerable individuals – People who are susceptible to external influences that threaten their financial well-being can benefit from the security and structure of a spendthrift trust. If your loved one has been taken advantage of before, you may worry that they will be exposed to improper influence again.
- Those with addiction disorders – A spendthrift trust could prevent a beneficiary from exhausting the trust fund to support an addiction to gambling, illicit substances, or compulsive spending.
What Are the Benefits and Drawbacks of Spendthrift Trusts?
Spendthrift trusts have several benefits:
- Shielding assets from creditors and lawsuits.
- Providing your loved one steady income stream without allowing them to exhaust the trust through overspending. This can be particularly helpful if you have concerns about your loved one’s ability to make money independently.
- Preserving generational wealth and preventing your loved one from blowing a significant portion of their inheritance.
Encouraging responsible money habits. Providing a younger person with full access to the trust only after they turn 21 can help them develop budgeting skills. Likewise, you may choose to limit them to a certain amount of monthly income.
Yet these types of legal arrangements can also have drawbacks for some.
- They can be expensive to create and maintain. SmartAsset reports that setting up a trust can cost between $1,500 and $2,500. (For many, however, the cost is worth the benefits, as they protect their loved ones’ financial future.)
- Legal disputes may arise. If the beneficiary wants to receive all the funds prematurely, they could challenge it in court. In instances with multiple beneficiaries, they may fight over the contents of the trust.
- As the trustee has significant discretion, the trust can be vulnerable to mismanagement. Selecting a trustworthy individual or entity to serve as a trustee is crucial.
Consult With Your Attorney
If you want to learn more about creating a spendthrift trust to provide for your loved ones, consult your estate planning attorney. They can help you decide whether a spendthrift trust is right for your unique situation.
