During the creation of your estate plan, you will likely be required to make numerous decisions. Some of those decisions may not be easy to make and some may require you to be brutally honest with yourself. Such is the case when one of your beneficiaries falls into the “spendthrift” category. Once you have admitted that a loved one has a problem handling money, you must then decide how to handle that revelation within your estate plan. A Waukegan living trust attorney at Hedeker Law, Ltd. explains how a spendthrift trust may provide a solution that does not put your assets at risk.
The Spendthrift Beneficiary
Although it may not be easy to admit, acknowledging that one of your beneficiaries cannot be trusted with a large sum of money is crucial to protecting your assets within your estate plan. A spendthrift beneficiary is someone who never seems to be able to handle money and/or who spends way more money than he/she should. The truth is that most families have at least one. Sometimes the lack of financial acumen has an actual cause, such as drug or alcohol addition, a gambling problem, or mental illness. Other times there is no obvious explanation for a beneficiary’s inability to handle money. Either way, when you know a beneficiary cannot responsibly manage his/her finances you must take steps to protect the inheritance you have earmarked for that beneficiary. Failing to do so is akin to throwing your money down the drain.
Living Trust Basics
A living trust is one of two broad categories into which trusts are divided, with the other category being testamentary trusts. The primary difference between the two is that a living trust activates during the lifetime of the Settlor, or creator, and a testamentary trust activates at the time of the Settlor’s death through a provision in the Settlor’s Last Will and Testament. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason.
What Is a Spendthrift Trust?
Knowing from the outset that you do not want to hand your spendthrift beneficiary a large lump sum of money, the question becomes how do you protect that money while still providing for your loved one? Creating a spendthrift trust is one common solution.
A spendthrift trust is a specialized type of living trust that allows you to do several things which will help prevent your spendthrift beneficiary from frittering away his/her inheritance. First and foremost, instead of just handing the beneficiary a lump sum of money, the inheritance is transferred into the trust and a Trustee is appointed to administer the trust. The Trustee of a trust has a number of important duties and responsibilities, starting with the duty to protect and manage the assets you transfer into the trust – and to do so with the best interest of the beneficiaries of the trust in mind at all times.
In addition, as the Settlor (creator) of the trust, you have the ability to create trust terms that will dictate when disbursements are made to the beneficiaries and the amount of those disbursements. You can also use the trust terms to limit what trust assets can be used for by the beneficiary. You could, for example, include terms that only allow trust assets to be used to pay required living expenses of the beneficiary. If the beneficiary is a spendthrift because of an addiction or mental health issue, you could even use the trust terms to limit the beneficiary’s direct asset to assets and insist that the funds held in the trust be used for the beneficiary’s treatment. Creating a spendthrift trust for your spendthrift beneficiary does not prevent you from leaving lump sum inheritances to other beneficiaries; however, you can use the same trust to distribute assets to other, non-spendthrift, beneficiaries as well if you so choose.
Contact a Waukegan Living Trust Attorney
For additional information, please download our FREE estate planning worksheet. If you have additional questions or concerns about how a spendthrift trust fits into your estate plan, contact the experienced Waukegan living trust attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.