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Tim Alles
Jordan Bush
Chris Shourds
Previous Newsletters
April 2021 Does My Estate Plan Have An Elephant In The Room? (Part I)
March 2021 How Can I "Trust" My Trustees?
February 2021 What Do Tiger Woods' Tweets, and Your Social Media Content
Have to Do with Estate Planning? (Part II)
January 2021 What Do Tiger Woods' Tweets, and Your Social Media Content
Have to Do with Estate Planning? (Part I)
December 2020 What Are Estate Taxes And Why Do They Matter?
November 2020 What Life Events Should Trigger an Estate Plan Review?
October 2020 My Child Is A Spendthrift. What Can I Do To Protect Their Inheritance?
September 2020 What Is the Difference Between Estate Planning and Elder Law?
August 2020 Estate Planning After a Divorce - What Does It Mean for Your Estate Plan?
July 2020 What Should You Expect From Your Trustee?
June 2020 Should You Pass Your Assets Through A Trust Or A Will?
May 2020 Important Issues To Consider For Your Estate Plan
April 2020 Important Estate Planning Considerations During a Pandemic Crisis
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My Child Is A Spendthrift. What Can I Do To Protect Their Inheritance?
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What is a parent to do when they want to treat children equally, but are afraid
that one of their children will waste their inheritance within weeks or months
of inheriting it? This is a very common problem! Fortunately, there is a
longstanding concept in trust law known as “spendthrift” protection.
What Is A Spendthrift Clause?
A Spendthrift Clause is a provision in a trust that
prevents a beneficiary, and creditors of a beneficiary, from being able to
compel a Trustee to make distributions of trust property.
Key advantages include:
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A child, or other family member, who cannot manage their finances
conservatively, will be protected and restricted from unlimited distribution
of funds.
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Generally, assets are protected from the creditors
of the beneficiary.
How Does A Spendthrift Clause Protect My Beneficiary?
If
you leave assets to your child as an outright distribution, the inheritance will
not be protected from the possibility of wasteful spending, lawsuits, creditors,
or even divorcing spouses. Under
spendthrift rules of most states, a person is free to leave assets in trust for
another person, with specific language in the trust specifying who, besides a
trust beneficiary, can have access to the trust assets.
For example,
a “spendthrift” clause can
specifically state that trust income and principal is
not to be available for payment to a trust beneficiary’s
creditors. Generally, this type of
trust is immune from attack by a beneficiary’s creditor.
This protection applies, regardless of the amount or nature of a
beneficiary’s liabilities and would include protection of the trust assets if
the child were to go through a divorce.
However, the
extent of protection offered by a trust with a spendthrift clause will depend
upon state law. In some states,
certain creditors are still allowed access to a trust.
This might include a beneficiary’s obligations for alimony or child
support, payments to creditors who have provided certain “necessities of life”
to the beneficiary, such as food and shelter, as well as government claims.
How Can I Make Sure The Inheritance Is Used
Appropriately?
Your
trust can have very specific language on how, and for what purposes, funds are
to be distributed. Examples include:
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Specifying that distributions can only be made to your child if they are
gainfully employed.
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You can establish guidelines that trust funds are to be used for funding
non-luxury items, such as a used but safe car for transportation, and only
if the beneficiary is able to pay for the ongoing maintenance and insurance
of the car.
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You can allow the Trustee to pay for
expenses such as funding education, or for healthcare needs.
Where Do I Begin?
It is very important to consult with an
experienced estate planning attorney who
can prepare a well-designed trust, with a spendthrift clause, so you can take
advantage of as many protections are available.
The extent of protection offered will depend upon the law in your
state. Your attorney will draft the spendthrift clause to best meet the needs of
you and your family.
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