Imagine you have an 18-year-old child, and you have $3 million in your retirement account. You know that your 18-year-old isn't ready to handle this amount of assets, but you also want your child to receive the money if you unexpectedly pass away. One way to handle this issue allows you to safeguard your assets from being spent irresponsibly while still permitting your son or daughter to benefit from them. The strategy involves the use of a spendthrift trust.
A spendthrift trust involves the creation of a trust with a spendthrift provision and other kinds of protective clauses. Estate planners can create these trusts immediately or set them up to be created automatically at death via a will or testamentary.
A trustee with discretionary authority generally manages the assets contained within spendthrift trusts for the benefit of the beneficiary. The spendthrift trust will generate income to be paid to the beneficiary, but the beneficiary will not have direct access to the trust funds. This way, an irresponsible heir will not expose the trust funds to poor spending habits or to creditors in the event that the beneficiary defaults on a major loan. The trust could also protect its assets if the beneficiary files for bankruptcy or gets a divorce.
In order for a spendthrift trust to withstand a challenge in court after the creator passes away, the trust needs to be drafted in a specific way. If you want yourself and your family to benefit from this kind trust, make sure you understand the intricacies of these trusts to ensure you've executed yours appropriately.