You likely know your children better than anyone else, including how they handle money. One child may receive a substantial inheritance and invest it for retirement or a rainy day. Another child, upon receiving their inheritance, will go out and blow it all on luxury cars and extravagant vacations.
While you want your children to enjoy their inheritance, you also understand the importance of protecting them from their own impulses. For that child, you may want to consider a spendthrift trust.
The pros and cons of a spendthrift trust
A spendthrift trust restricts the beneficiary’s access to the trust principal. It safeguards the assets from being squandered or claimed by creditors. You would create the trust and appoint a trustee to manage the assets and make distributions to the beneficiary according to the trust’s terms.
A spendthrift trust is beneficial in certain situations, such as:
For minors or young adults who don’t have the experience to handle a large inheritance.
Ensuring the care and support of a beneficiary with special needs without disqualifying them from government assistance programs.
Providing a safety net for individuals with addictions or struggle with financial management.
Shielding assets for heirs with potential legal troubles or creditors
While spendthrift trusts do offer the benefits of asset protection, controlled spending and long-term financial security, there are potential drawbacks including:
The frustrated feeling a beneficiary may have by the lack of control over their inheritance, especially if they believe they are capable of managing their finances independently.
The dependence on the trustee to manage the trust with integrity and financial expertise.
The complexity and cost of setting up the trust and the ongoing administration expenses.
A spendthrift trust can offer peace of mind that your child’s inheritance will be protected and provide them with financial security. But it’s important to consider the pros and cons carefully. You should discuss your goals and concerns with someone who can guide you in determining if a spendthrift trust is the right solution for your unique circumstances.