When it comes to planning your estate, providing for your loved ones is a top priority. However, concerns about their financial responsibility and potential external threats like creditors or a disgruntled spouse may arise. Fortunately, there is a solution: a spendthrift trust.
What is a Spendthrift Trust?
A spendthrift trust protects beneficiaries who might squander their inheritance or fall victim to creditors. Instead of granting direct control over the funds to the beneficiaries, an independent trustee is appointed to manage and distribute the assets to benefit the heirs. In turn, that helps protect them from their own financial carelessness and potential exploitation by others.
Spendthrift trusts have several advantages for those seeking to protect their heirs. These benefits include:
- Control over spending: If there are concerns about immature or irresponsible heirs, a spendthrift trust provides a mechanism to manage how and when the money is spent, ensuring responsible use.
- Asset protection: One of the biggest benefits of a spendthrift trust is limiting a third party’s access to the funds, such as a creditor or an estranged spouse.
Do You Need a Spendthrift Trust?
Setting up a spendthrift trust is a decision that depends on various factors, and there is no one-size-fits-all answer. However, a spendthrift trust could benefit your estate in a few scenarios.
If you have concerns about the responsibility of your intended beneficiaries, especially if they have a history of reckless financial behavior, a spendthrift trust can provide a way to control and protect their inheritances.
When the beneficiaries are young or immature, a spendthrift trust can distribute funds at specific life stages, such as graduation, marriage or homeownership, rather than providing a lump sum at a young age.
Sometimes, your beneficiaries may face potential creditors due to personal debts or legal issues. A spendthrift trust can help protect the assets from being seized to satisfy these obligations.
If you want to protect the inheritance from being divided in the event of a beneficiary’s divorce, a spendthrift trust can help shield those assets from becoming marital property.
When you have individuals with special needs, a spendthrift trust can be structured to ensure they receive the necessary financial support while preserving eligibility for government assistance programs.
In situations where estate taxes are a concern, a well-structured spendthrift trust can be part of a comprehensive plan to minimize tax liabilities.
A spendthrift trust can provide a clear framework for asset distribution if there are complex family dynamics, such as strained relationships or concerns about potential disputes among beneficiaries. In turn, the spendthrift trust can reduce the likelihood of conflicts.
Business owners may use a spendthrift trust to plan for their company’s succession. These trusts help to promote a smooth transition and protect assets from potential business-related liabilities.
How To Set Up a Spendthrift Trust
Setting up a spendthrift trust is not difficult, but you may want to consult with an experienced estate planning lawyer to help do so. There are plenty of considerations you need to outline with these trusts. For example, you may want to add a few conditions, such as requiring heirs to reach a certain age before receiving payments or stipulating that payments are made at certain life stages or the attainment of specified goals.
Of course, the selection of the trustee is an important factor in the success of a spendthrift trust. The trustee has discretion in distributing funds, so you want to choose a reliable and experienced individual for this role. This person will act on your behalf, protecting the assets from mismanagement.
Reach Out to a New Jersey Estate Planning Lawyer
Estate planning can be complex, but a spendthrift trust can be a valuable tool for those who want to protect their heirs from financial mismanagement. Along with that, spendthrift trusts can help control spending and safeguard assets from creditors, which makes them an attractive option for those with specific concerns about their beneficiaries.
If you want to set up a spendthrift trust, The Knee Law Firm, LLC, can help. Contact our Hackensack office at 201-996-1200 or visit our website to arrange an initial consultation with one of our estate planning lawyers.