Typically used to prevent a beneficiary from receiving his or her inheritance all at once is known as a spendthrift trust. A grantor, the person who creates the trust, may want to consider this approach for several reasons. The most apparent reason is that the grantor thinks the beneficiary will go through the inheritance more quickly than expected, or the beneficiary is a spendthrift.
There are other reasons that a spendthrift trust may be appealing including:
- The beneficiary (or their partner) has considerable debts and, therefore, the inheritance could be lost to creditors
- The beneficiary may be in an unstable partnership in which divorce is possible
- The beneficiary has friends that are unreliable with money and may be a bad influence on the beneficiary
- The beneficiary makes poor decisions when it comes to finances
- The beneficiary has a drug or alcohol dependency
Looking at the above list, how can a spendthrift trust protect someone in this position? First, the beneficiary’s inheritance can be distributed in specified amounts over time, allowing some control to ensure the entire inheritance cannot be lost all at once. Furthermore, since the beneficiary cannot access the assets in the trust, or promise them to someone else, they are then protected from vulnerability. Because of these measures, this means creditors and other threats cannot reach the trust’s assets either. That said, although these protections are in place, they can only go so far, meaning what is distributed to the beneficiary as directed is subject to lose.
The Trustee’s Role
One very important step with a spendthrift trust is to choose one’s trustee carefully. Why? Because the terms of the trust give the trustee control over trust assets and their distribution to the beneficiary. Likewise, it is extremely important to outline the trustee’s authority in detail. Below are some examples of factors to consider when setting the terms of the spendthrift trust:
- Does the trustee have some discretion to choose the amount and timing of distributions, or should the trustee be instructed to make fixed payments according to a specified schedule?
- Should the trustee make all distributions in cash, or should they provide the beneficiary with goods and services instead?
- Can the trustee deny distributions if the beneficiary behaves inappropriately? If so, what types of behavior would cause the withholding of assets?
As you can see above, the trustee may have a significant role in administering the trust and managing the beneficiary’s inheritance, the choice of trustee should be taken thoughtfully. Similarly, the trustee should not make their decision lightly to accept the position. In some situations, the trustee may very well be performing the role of mentor, disciplinarian, or even parent. Furthermore, the trustee may be held legally and financially responsible for failing to follow the mandates of the trust.
Other factors to consider when creating a spendthrift trust include how and when the trust will end, what will happen if the beneficiary “grows up” and develops the maturity to manage the inheritance, and what should be done with trust assets if the beneficiary passes away.
To learn more about the details of a spendthrift trust or to address any other matter related to reigning in your finances, do not hesitate to reach out to the Deliberato Law Center either by calling our office at (216) 341-3413 or using the contact form on our website.
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