As a parent, your children mean a lot to you. You want to provide for them after you pass away. Therefore, part of your estate planning involves leaving them a portion of your money. However, one of your children may be financially irresponsible, and he or she may spend money recklessly or not be entirely sure how to properly manage finances.
To protect them from blowing their inheritance in a short period, you can set up what’s known as a spendthrift trust. A spendthrift trust is a way for you to control how the beneficiary spends the funds in the trust, even after you pass away, but you may be asking: How does it work?
How does it work?
The first step in understanding how a spendthrift trust works is knowing who the players are:
- The grantor: The person creating the trust (you)
- The beneficiary: The recipient of the trust funds (your child)
- The trustee: The person(s) who will control the flow of trust funds to the beneficiary
As the grantor, you will outline instructions for when and how the trustee will disburse principal to the beneficiary. You can set the terms for monthly or annual payments for just a few years or for a lifetime. For example, you could determine that your child is to receive a portion of the trust principal every 5 years. The trustee will be responsible for disbursing those funds and following the terms of the trust.
Why not just leave a lump sum inheritance?
You may be wondering if it would be easier to simply leave a lump sum inheritance to your child. It may be easier to leave your child a lump sum inheritance, but adult children may spend inheritance money more carelessly than their own. With a lump sum inheritance, there are no limitations as there are with spendthrift trusts, leaving your child room to squander your life’s hard work.
A spendthrift trust can preserve the inheritance and help your child pay expenses for several years.
Safeguarding your child’s future
Helping your child financially after you pass away isn’t always something you can plan for. But with a spendthrift trust, you can protect them and your inheritance. If you are considering setting up a spendthrift trust, you may benefit from speaking with an attorney to learn more.