The Elder and Disability Law Firm, APC
You may need to draft a spendthrift trust for some of your heirs
Redlands residents who are doing their estate planning frequently encounter a dilemma. They may have one or more heirs who, over the years, has proven to be incapable of managing their own fiscal affairs responsibly.
Sometimes this may be due to drug or alcohol abuse or a weakness for sports betting or the track, but other times it appears to be an inherent inability to make wise financial decisions. These potential heirs may have a past littered with multiple bankruptcies and failed business opportunities.
Estate planning for spendthrift heirs
If you have adult children or grandchildren whom you plan to name as heirs but who are hopeless with money, you're right to be concerned at how they might handle sudden prosperity. A steady supply of cash has been the undoing of many people, so you may decide the best option is to protect them from themselves and their instincts.
Enter the spendthrift trust. This option allows you as the trust grantor to designate a trustee who will disburse funds to the heir(s) on a preset schedule according to your directives. Under extraordinary circumstances, e.g., protracted illness that runs up costly medical bills, the trustee has the discretion to approve or deny additional funds to be released to your heir.
In most cases, you can also structure the spendthrift trust to protect the principle from your heir's creditors. This comes in handy when an heir is financially responsible but may work in an industry like the medical field where lawsuits are a frequent occupational hazard.
How it's set up
Once you decide on a sum to leave your heir - which can either be a percent of the estate or a specified dollar amount - you decide the trust's terms. Include guidelines for both mandatory and discretionary disbursements and also how the trust will terminate, which might be at the beneficiary's reaching a certain age or upon his or her death. You will also need to address the disposition of any remaining trust assets at its termination.
Not all heirs are equal
It's punitive to restrict all heirs from their portion of your estate because one or more are fiscally irresponsible. Therefore, it's entirely possible to leave one beneficiary their full behest in a lump sum and still structure another beneficiary's inheritance within a trust.
It's also possible to incentivize a trust to pay out disbursements at lifetime milestone events - college or grad school graduations, marriages, home purchases, childbirth or certain birthdays.
Is a spendthrift trust the right choice for your heirs? While not an option for everyone, a spendthrift trust can be a good choice for some who are contemplating their estate planning options.