Who should use a spendthrift trust?

On Behalf of | Jul 28, 2020 | Estate Planning |

Planning how to give your children an inheritance is not always easy. Even if your will successfully conveys money or property to your loved ones, they could still lose their inheritance because of events out of their control or even through their own poor judgment. To alleviate worries that such problems may happen, some parents create a spendthrift trust for their children.

According to Kiplinger, you can set limits on how to spend money in a spendthrift trust. Not all families need a spendthrift trust, but it could be the right move for you depending on your circumstances. The Kiplinger article explains different scenarios in which a family may benefit from using one.

For young children

You may want to consider a spendthrift trust because you do not know the kind of spending habits your child will develop if you should suddenly die while your child is very young. Although your child may still grow up to become a responsible adult without your guidance, you might still want some assurances that your child will not waste an inheritance.

For children with drug problems

Some children have substance abuse issues. You would not want a child battling addiction to waste an inheritance on drugs or to use the money while under the influence, which will likely result in poor financial decisions. With a spendthrift trust, you can put conditions for spending the money in the trust. You might also make spending the money dependent on your child passing a drug test.

Protection from creditors

Some adult children face debt problems like a hefty credit card bill or a student loan debt. If you leave your loved ones a traditional inheritance through a will, creditors may get a hold of that money. On the other hand, if you create a spendthrift trust, the trust will own the assets, not your children. As a result, creditors cannot lay a claim to that money.

Protection from other parties

Depending on your family dynamics, you may want to add some protection to your child’s inheritance. If your child has a manipulative friend or family member, you could set up a spendthrift trust to keep the money away from the malicious party. Also, if your child plans to marry, you might also use a spendthrift trust to protect your child’s inheritance in the event your child gets a divorce.