While you may remember some of the adventures (and misadventures) of your youth very fondly, don’t you wish you could avoid some of the bigger mistakes you made? Hindsight is often 20/20, especially where financial matters are concerned.
What if there was a way to use your hard-earned wisdom to prevent your heirs from making some major financial mistakes in their own lives? A “spendthrift” trust might be the best option for any inheritance you intend to leave behind.
Spendthrift trusts prevent direct access to the money
A spendthrift trust is one where the funds are disbursed at the discretion of the trustee (and according to the terms of the trust), not necessarily at the will of the beneficiary. The beneficiary has no direct access to the funds. This ultimately:
- Makes it difficult for people to take financial advantage of a young or naive beneficiary who may be too trusting for their own good
- Prevents a beneficiary who isn’t particularly fiscally responsible from blowing through their inheritance in a few months buying fancy cars and other frivolous things
- Stops a beneficiary with an addiction, be it gambling, drugs or something else, from using the assets to feed their problem
- Protects the funds from creditor claims, since they aren’t in the control of the beneficiary and don’t directly belong to the beneficiary
- Protects the funds from being divided in a divorce, should the beneficiary end a troubled marriage
You can even add incentives to the trust that will encourage your beneficiaries toward better lives. For example, if your beneficiary has a drug problem, the trust could require them to attend rehab to obtain more funds. Or, you could set the trust up to pay out “bonuses” for things like attending trade school or college.
Keep this in mind: If you should die before your child is an adult, they would have full control of everything you leave behind once they turn 18 years of age – and that’s awfully young to face that kind of responsibility. A properly established trust, however, can prevent a lot of issues, which is why they’re becoming more popular than ever as an estate planning tool.