“How to Protect Against Spendthrift Beneficiaries” by Attorney Jim O’Brien (Audio)
Sometimes, the most difficult part of creating an estate plan is not deciding who to include as beneficiaries, but deciding how to gift assets to those beneficiaries. For example, you may be reluctant to pass down assets directly to a beneficiary because that individual cannot be trusted to manage his/her own money for one reason or another. If you find yourself in that position, a spendthrift trust may be the solution. For those who are unfamiliar with the concept, the Annapolis estate planning attorneys at Sinclair Prosser Gasior explain how a spendthrift trust works.
The Problem Beneficiary
Do you have an adult child, or another beneficiary, who qualifies as a spendthrift? This is someone who never seems to be able to handle money and/or who spends way more money than he/she should. Most families have one. Sometimes the lack of financial acumen has an actual cause, such as an addiction problem or a mental illness. For other spendthrifts, there is no obvious reason why they don’t handle money well; however, it is a universally agreed-upon fact that money management is not their strong suit. Understandably, the thought of handing a spendthrift beneficiary a sizeable inheritance likely makes you nervous. Fortunately, there is an estate planning tool that can help.
What Is a Trust Agreement?
At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. The terms and provisions of a trust are reduced to writing in a document referred to as a “trust agreement.” Trusts are broadly divided into living trusts and testamentary trusts with the former activating during the lifetime of the Settlor (the creator of the trust) and the latter typically being activated at the time of the Settlor’s death by a provision in the Settlor’s Will. Living trusts can be further sub-divided into revocable and irrevocable living trusts.
How Does a Spendthrift Trust Work?
One of the many benefits of using a trust instead of a Will to distribute an inheritance is the ability to retain a certain amount of control over how that inheritance is used. A spendthrift trust is a specialized type of trust that is aimed at preventing the beneficiaries of the trust from squandering their inheritance. Very specific language must be used to create a spendthrift clause; however, when drafted properly, a spendthrift clause will prevent a beneficiary from spending the trust funds frivolously as well as prevent borrowing against those funds or encumbering the funds in any way. A spendthrift clause can also prevent creditors of the beneficiary from accessing the trust funds to pay the debts of the beneficiary. In short, a spendthrift trust wraps the trust assets in a layer of protection against both outside claims to the assets and against the beneficiary’s inability to handle money.
Do Spendthrift Provision Work?
Because state laws govern most aspects of trust creation and trust administration, it is important to work closely with an experienced attorney to ensure that the spendthrift provision within your trust agreement complies with the applicable laws and will work as intended once the trust becomes active.
Contact an Annapolis Estate Planning Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about incorporating a spendthrift trust into your estate plan contact an experienced Annapolis estate planning attorney at Sinclair Prosser Gasior by calling (410) 573-4818 to schedule an appointment.
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