Many families have concerns about their potential beneficiaries’ or heirs’ spending habits. If you are worried that your child, grandchild, or other beneficiary may be reckless with an inheritance, there are ways to provide for their long-term security while also protecting your hard-earned assets.
One option is to create a type of irrevocable trust known as a spendthrift trust. The purpose of a spendthrift trust isn’t just to protect irresponsible heirs from themselves, even the most financially responsible heirs can be exposed to frivolous lawsuits, unscrupulous creditors, or a dishonest business partner or spouse.
A properly designed trust with a carefully drafted spendthrift clause can protect your family’s assets against such attacks and can also protect your loved ones in the event of relationship changes. If one of your children divorces, your child’s spouse generally can’t claim a share of the trust property in the divorce settlement.
Also, if your child predeceases his or her spouse, the spouse generally is entitled by law to a significant portion of your child’s estate. In some cases, that may be a desirable outcome, but in others, such as second marriages when there are children from a prior marriage, a spendthrift trust can prevent your child’s inheritance from ending up in the hands of his or her ex-spouse rather than in the hands of your grandchildren.
A variety of trusts can include a spendthrift clause, which restricts a beneficiary’s ability to assign or transfer his or her interest in the trust and restricts the rights of creditors to reach the trust assets. Additionally, you can direct the trustee to give a particular beneficiary a monthly allowance and/or periodic lump sum payments for life or until the funds are fully disbursed, or you can give the trustee discretion on when to distribute money ahead of schedule but only for specific purposes such as education, medical expenses, or other necessities.
Generally, the more discretion you give the trustee over distributions from the trust, the greater the protection against creditors’ claims. If the trust requires the trustee to make distributions for a beneficiary’s support, for example, a court may rule that a creditor can reach the trust assets to satisfy support-related debts. For increased protection, it’s preferable to give the trustee full discretion over whether and when to make distributions.
A properly constructed spendthrift trust protects the proceeds you leave the beneficiary from possible claims by his or her creditors. In general, creditors cannot access any of the Spendthrift trust assets until they are distributed to the beneficiaries although they sometimes can be tapped to pay for alimony or child support.
Please note that this article is a general summary of law and omits many important details, footnotes, and caveats. It is no substitute for legal advice from a lawyer based on your particular circumstances.
For more information or to speak with a lawyer, please call us at (530) 268-5485, visit our website, www.LenhartLawOffices.com, or send us an email at Gabriel@LenhartLawOffices.com.