What is a spendthrift trust?

On Behalf of | Jan 6, 2022 | Estate Planning

As a parent, you have likely done your best to prepare your children for the outside world. You will also want to pass on as much of your belongings as you can to your children when you die. The sad truth is that while you may have tried to instill a sense of fiscal responsibility in your children, they may have grown up with frivolous financial habits.

Modern American culture promotes spontaneous spending, and there are numerous expensive addictions that affect adults, ranging from gambling to alcohol. If you have a child that you worry will misuse or waste the inheritance that you leave for them, a spendthrift trust could be the ideal solution for your situation.

The obvious issue with a standard inheritance

The more assets you have to leave behind for your children, the greater the risk that they could misuse or squander that inheritance. When you leave resources for a child in a will, the recipient has control over those assets as soon as they receive them from the estate. They can sell them, give them away or do anything that they choose with what is now their property.

Someone with an addiction could go on a bender, while someone with shopping issues could send their way through tens of thousands of dollars in just a few weeks with nothing truly meaningful to show for it. Creating a spendthrift trust allows you to leave assets behind for your children while preventing the potential abuse of those assets.

How a spendthrift trust works

When you put property into a spendthrift trust, you potentially allow your loved ones access to those resources in certain situations. You can limit how much they can access that one time or even the specific purposes that they use trust assets for, and you choose a trustee to follow your instructions when your child wants access to those assets.

You might allow your children to use trust funds for educational, housing or health care expenses but not credit card bills. You might let them present receipts to a trustee for reimbursement or require that they provide an actual bill so that they don’t pocket any money to spend elsewhere. A spendthrift trust is an important tool that lets you continue to support your loved ones after your death without risking that they will waste the legacy you want to leave to them.

Adding a spendthrift trust to your estate plan can be a great way to protect your children from their own financial bad habits.