If you are like most people, the primary purpose of creating your estate plan is to ensure that your assets are passed down to children, grandchildren, and/or other loved ones to be used for their support and maintenance after you are gone. You worked hard and saved wisely throughout the course of your lifetime, however, and do not want to see those assets wasted. This can create a conundrum if you have an adult child, or other beneficiary, who is less than responsible with money? How can you provide for him/her without putting your assets at risk? One answer may be to create a spendthrift trust.
The Family Spendthrift
As much as we all prefer not to admit it, most families have one – the family spendthrift. That individual who simply cannot seem to manage money. No matter how many times you have explained financial planning, no matter how often you have helped set up a budget, no matter how many times he/she has gotten in a financial jam, this individual just cannot seem to get the hang of financial responsibility. In even more dire situations, the family spendthrift has a hidden (or not so hidden) secret that is at the root of his/her financial irresponsibility. It might be a drug or alcohol problem, a gambling addiction, or even a mental health issue such as being bi-polar that causes impromptu and irrational spending sprees. Whatever the reason, the family spendthrift creates a very real problem when it comes time for you to create your estate plan. Understandably, you are unwilling to simply hand over a lump sum of money to this individual because you might as well just throw it in the trash if you go that route. Conversely, if the family spendthrift is your son, daughter, or grandchild, you may not be comfortable with completely disinheriting him/her. Moreover, how do you handle the situation if your other children/grandchildren are all responsible with their finances? If you have four children, for example, but only one of the them has the propensity to squander money, should you structure your estate plan in a way that provides different gifts to each child but ultimately creates a fair distribution of your estate assets or do you feel compelled to give each child the same gift in your plan? Fortunately, there is an estate planning solution for the family spendthrift dilemma – a spendthrift trust.
What Is a Spendthrift Trust?
The risk of leaving an outright gift to the family spendthrift is obvious – as soon as the assets are transferred to him/her you have lost control of them. Of course, that is always the risk when making outright gifts to beneficiaries in your Last Will and Testament. Once ownership of an asset changes hands, your ability to control the asset evaporates. If, however, you establish a trust that can then be used to protect the assets you intend to gift to beneficiaries, you have the continued ability to control the fate of those assets and provide the family spendthrift with protection from his/her own irresponsible spending habits.
All trusts begin with the same core elements, including a Settlor (you in this case), a Trustee (the person or entity that oversees the administration of the trust and manages trust property), and at least one beneficiary (your daughter in this case). As the Settlor of the trust you have the ability to create the trust terms, meaning you decide when distributions will be made from the trust and how much those distributions will be. You also have the ability to give your Trustee as much, or as little, discretion as you wish with regard to making distributions. Instead of gifting your beneficiaries a lump sum of money upon your death that your spendthrift child/grandchild will likely run through in record time with nothing to show for it, your trust fund can be utilized to dole out small amounts of money at a time. The hope, of course, is that by only giving your spendthrift beneficiary a small amount of funds at a time, they won’t be wasted.
For additional information, please download our FREE estate planning worksheet. If you have additional questions about creating a spendthrift trust, contact the experienced North Carolina estate planning attorneys at The Law Offices of Cheryl David by calling 336-547-9999 to schedule an appointment.