Taking financial care of your loved ones involves many decisions, some of which can be difficult. Not all beneficiaries are the same, nor should they necessarily be treated equally. Giving someone a large amount of money in a lump sum may not be the smart thing to do, either for your estate or the beneficiary.
What is a spendthrift trust?
A spendthrift trust is like a standard trust in most respects. However, it contains a clause – the ‘spendthrift clause’ – that restricts the manner in which money is given to the beneficiary. The person setting up the trust designates when the money is to be distributed and in what amount.
Rather than receiving the wealth in a lump sum, the beneficiary may receive it weekly, monthly, annually or in whatever fashion is designated.
Not everyone is ready to handle large amounts of money
Perhaps the beneficiary is young and just getting started in life. They have yet to learn the importance of money management and how quickly it can disappear. To protect them and their inheritance, a spendthrift clause may be appropriate.
Professions prone to lawsuits
Some people are professionals or may own a business susceptible to law suits. If they were granted a trust in a lump sum, that money would be vulnerable to any potential lawsuit. With a spendthrift trust, future funds are shielded from judgement – only the money paid to the beneficiary may be accessed.
Creditors
Similarly, creditors cannot lay claim to the trust itself. Any money they can demand must come from what the beneficiary possesses. They can go after the monthly/annual distribution but they cannot touch the trust’s principal.
Spendthrift trusts may be either revocable or irrevocable and made either independently or as part of a will. Although there are many factors to consider, speaking to an experienced professional will ensure you make the right decisions for you and your beneficiaries.