You have worked hard for your wealth, and now you want it to benefit your loved ones for as long as possible. Granted, your assets may not last forever, but perhaps you want your family to stay financially secure for years or even decades to come.
Unfortunately, not everyone manages money well. It is not uncommon for estate funds to dry up quickly due to family member’s financial mismanagement.
If you are worried about how your beneficiaries will manage their inheritance, a spendthrift trust might be just what you need.
What is a spendthrift trust and how does it work?
As the name suggests, a spendthrift trust is specifically designed to protect assets from being wasted by the beneficiary or seized by creditors.
In this type of trust, the trustee has control over the distribution of trust assets, rather than the beneficiary. This can help prevent the beneficiary from making poor financial decisions or mismanaging the funds.
You can outline specific rules of how and when you want the trustee to disperse funds. For example, suppose you have a grandchild prone to impulsive spending. You want to leave them a substantial inheritance, but you are concerned that they might quickly exhaust the funds on unnecessary things.
With a spendthrift trust, you can specify that your grandchild will receive quarterly distributions for living expenses only, and they will only receive larger sums for education or buying a home.
Can a spendthrift trust protect assets from creditors?
A spendthrift trust can also help protect your assets from creditors. According to New York law, most creditors cannot access trust funds as long as they remain within the trust and are not yet given to the beneficiary.
However, trust funds are not safe from certain debts, such as federal tax liens and child support obligations.
Who needs a spendthrift trust?
Determining if you need a spendthrift trust will ultimately depend on your family’s specific circumstances. Many people create these trusts if they have beneficiaries who are:
- Prone to overspending and racking up debt
- Vulnerable to financial exploitation
- Too young or inexperienced to manage money on their own
- Working in a field with a high risk of lawsuits, e.g., healthcare, finance
Essentially, anyone concerned about their assets lasting should consider a spendthrift trust. It can be a powerful tool to support your beneficiaries, especially the younger ones, for as long as possible.
If you want to create a spendthrift trust, consider talking to an estate planning attorney. They can guide you through the process and help ensure your trust aligns with your estate planning goals.