Parents often want to leave an inheritance for their children. But what if your children are not the most financially responsible people? A trust can provide a flexible means for managing your money after your death so that a “wild child” won’t squander your life’s work.
It is common for a will or living trust to contain special provisions for children. Such a children’s trust leaves your estate to a trustee, who can then make distributions to your children for their health, education and maintenance, while reserving outright distributions until they reach a specified age, such as 21 or 25. But if your children are already adults at the time you are making an estate plan, you might consider a living trust with what is usually known as a “spendthrift” clause.
Basically, a spendthrift trust is where one person is named as beneficiary and another serves as the trustee. It is up to the trustee to make sure the beneficiary does not simply squander the principal assets in the trust. You can establish the spendthrift trust to give the trustee specific instructions and authority. For example, you might direct the trustee to give the beneficiary a fixed amount of income from the trust or each month. Or you might limit it further, saying the trustee will only make payments for the beneficiary’s rent or education. You may even allow the trustee to cut off the beneficiary entirely and redirect the trust’s principal to an alternate beneficiary.
Protecting the Beneficiary (and Your Assets)
A spendthrift trust is useful when a parent wants to leave an inheritance to a child with a history of personal or financial problems. If the child has suffered from a drug addiction, for instance, a spendthrift trust can help ensure your estate does not go to pay to support an expensive (and deadly) habit.
But even less extreme circumstances may warrant a spendthrift trust. If a child has amassed a lot of personal debt, say from excessive credit card use, a spendthrift trust can shield a potential inheritance from creditors. That is because the trust assets are not considered the personal property of the beneficiary until the trustee makes a distribution. As long as the assets remain with the trustee, most of the beneficiary’s creditors cannot attach a lien to them or otherwise attempt to collect said assets as part of a judgment. (There may be exceptions, such as tax debts and child support payments.) Of course, once the beneficiary receives a distribution, it is his or her personal property and may no longer be beyond the reach of creditors.
Like any type of trust, a spendthrift trust is a powerful, yet potentially complicated, estate planning tool. It is not the sort of document you should attempt to draft without the assistance of an experienced California estate planning attorney. If you would like to speak with someone right away, contact the Law Office of Scott C. Soady in San Diego.