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What is a spendthrift trust (and who should use one)?

On Behalf of | Oct 11, 2024 | Estate Planning

During the course of their estate planning, some people run into a thorny problem. They may have one or more beloved heirs who never learned how to properly manage their money.

Other times, the problems differ, as an adult child or grandchild could have a serious problem with gambling, drugs or alcohol. While the estate planner would never want to disinherit their loved one, neither would they want the funds they leave them wasted on a dissolute lifestyle.

What options do they have?

One way to prevent the funds from being liquidated is to set up a spendthrift trust fund. Here’s how it works.

The beneficiary is denied access to the trust’s principal, and the trust grantor appoints a trustee to oversee its management and the disbursements to beneficiaries. These types of trusts can be set up to distribute funds annually, semiannually, quarterly or even monthly. They can also be linked to major life events, with disbursements given upon graduation from college, marriage, the birth of a child or significant birthdays (25, 30, 40, etc.)

Are there negative consequences of spendthrift trusts?

Not necessarily, although some beneficiaries may perceive them as a form of “dead-hand control,” or an attempt by the trust grantor to control their beneficiaries’ lives from beyond the grave. 

Perhaps the worst consequence of these trusts is the shattered relationships that can devolve if the trust grantor appoints a relative as trustee over a sibling’s, child’s or parent’s funds. These relationships can be preserved by appointing an unrelated professional with knowledge and experience in trust management.

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