Loving your children does not necessarily mean you trust them with your money. Sometimes it is prudent to use appropriate estate planning tools to protect your money from being squandered and protect your children from themselves.
Adding a spendthrift provision to your trust allows you to control more details about the circumstances in which your beneficiaries will receive disbursements from the trust. For example, you can have the money disbursed in small payments over time, you can allow the trustee to disburse payments as needed to maintain your child’s lifestyle or you can require the trustee to use the money to make certain payments on your child’s behalf. There are several circumstances when this could be beneficial.
A child with poor money management skills
Young adults often lack essential money management skills because they simply have not managed their own finances for very long. However, sometimes people make poor financial choices for other reasons, such as drug addiction, gambling addiction or alcoholism. To prevent your child from squandering his or her inheritance, you can use a spendthrift trust to make sure the inheritance is disbursed in small amounts over time, either as payments or as goods or services purchased on behalf of the beneficiary.
A child with significant credit card debts
If you have a child who has significant credit card debt, a spendthrift trust may be the safest way to leave him or her financial assets. A spendthrift provision prevents your child from accessing his or her total inheritance at once. This means your child will not be able to spend it or borrow against it. It also means that any creditors that may be seeking payments for your child’s debt will be unable to take your child’s inheritance as payment.
A child likely to experience divorce
Another situation that may warrant a spendthrift provision is if there is a risk of an inheritance being divided in divorce. You may have a child who has already been married more than once or who’s current marriage is troubled. If your child becomes divorced, there may be a chance that his or her inheritance could be divided during the divorce process. However, a spendthrift provision could protect family money from this type of division in the same way it protects the money from creditors.
It may seem harsh to control the circumstances in which your child receives his or her inheritance. However, you have worked hard to earn your wealth so that it can be used appropriately. A spendthrift trust may be one way to help ensure your children and their inheritances are protected.