There is no one-size-fits-all estate planning approach, because each case is unique. This is why it is important to discuss your situation with an attorney. Strategies exist to address any type of scenario, and with this in mind, let’s look at planning for a spendthrift heir.
Revocable Living Trust
Generally speaking, assets that are transferred through the terms of a last will would be distributed in lump sums. This may be a source of concern if you have a poor money manager on your inheritance list.
The family member may burn through their inheritance too quickly and be in a vulnerable situation before very long. Since you will be gone, there may be no one left around who is in a position to provide financial support if it is ever needed.
Fortunately, you do not have to roll the dice in this manner. You could choose to establish a revocable living trust with the spendthrift loved one as the beneficiary.
It should be noted that you do not lose any control while you are alive and well. As the grantor, you would have the power to dissolve the trust, and you can act as the trustee and the initial beneficiary. You name a successor trustee to administer the trust after your death.
Any adult that is of sound mind that is willing to administer the trust can be chosen to act as the trustee. However, when you are providing for a spendthrift, you have to take a few things into consideration.
Being the trustee of a living trust is a relatively short term commitment if the assets are going to be distributed in their entirety as soon as possible. Things are entirely different if you want the beneficiary to receive limited assets over an extended period of time because of the spendthrift tendencies.
Longevity is a factor that should be considered, and if there are income producing assets in the trust, a high level of financial acumen is necessary. You also have to be concerned about conflicts, and if the trustee has a personal relationship with the beneficiary, heartstrings could be pulled.
An alternative that is right for some people is the utilization of a trust company or the trust department of a bank. Professional fiduciaries can be relied upon to manage the assets effectively, and they would be compelled to follow your instructions with no emotion.
The exact terms of the trust are up to you, but a lot of people would instruct the trustee to distribute investment income only so the principal can keep generating funds. You could allow for discretionary distributions and larger payouts when the beneficiary reaches certain age thresholds.
It is also possible to name another beneficiary to succeed the original one. For example, if one of your children is the beneficiary, you can make a grandchild the next beneficiary.
Through the inclusion of a spendthrift provision, the beneficiary’s creditors would not be able to go after the principal. This is another benefit to be gained through the utilization of a revocable living trust for a spendthrift heir.
There are other advantages, and they are considerable, but we will look at them in another blog post.
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To get your copy, visit our worksheet access page and follow the simple instructions.
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