As a parent (or grandparent), you most definitely love and want the best for your child. But while most children grow to become financially-savvy adults, some do not. And this can be a concern when leaving an inheritance for them.
If you are concerned about your child misusing their inheritance, you might want to take a few steps to better protect your hard-earned wealth. One of the most effective estate planning tools you can use to ensure that your dependents do not squander their inheritance is a spendthrift trust.
What is a spendthrift trust?
Basically, a spendthrift trust regulates how a beneficiary can access and utilize their inheritance. This type of trust ensures that the beneficiary accesses their funds on an incremental basis and/or only when approved of by a trustee.
Like with any trust, assets that are held in a spendthrift trust belong to the trust rather than the beneficiary. Thus, should the beneficiary get into financial trouble, creditors cannot recover assets held in the trust.
Understanding how spendthrift trusts work
If you set up a spendthrift trust, you can directly transfer the assets you want to bequeath your loved one directly to the trust or have them flow into the trust upon your demise. Once this is done, a trustee will manage the assets on behalf of your dependents and let them access their inheritance per the terms of the trust instrument.
Here are some of the potential benefits of setting up a spendthrift trust:
- Prevent your heir from wasteful spending habits
- Allow your heir to access their inheritance incrementally rather than at once
- Protect your assets from your heir’s creditors
- Avoid probate
Protecting your interests
One of the main reasons for creating an estate plan is to protect and preserve your legacy. By including a spendthrift trust in your estate plan, you will be taking measures to protect your loved ones, assets and legacy all at once.