Trust Protections from Creditors and Spendthrift Beneficiaries

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Trust Protections from Creditors and Spendthrift Beneficiaries

Question: My child will be my sole heir when I pass away, but I am concerned that he will not be able to handle a large sum of money effectively were he to receive it all at once. Additionally, I am interested in creditor protection for his inheritance. Would a trust protect the assets until he is more financially mature?

The short answer is yes.

Trusts are legal documents drawn up by estate attorneys whose job it is to listen to your wishes and craft an instrument that will implement those wishes. A trust can be set up that will allow you to treat it like a bank account during your lifetime, meaning you can open accounts in the name of the trust and put money into those accounts and take them out however you wish, but upon your death, the trust will follow a more complicated set of rules you set out for it.

Your will can also state that your assets go into the trust upon your death, or you can title assets in the name of the trust so that they do not even need your will to go straight into the trust. Before you re-title all your assets though, talk to a lawyer about the potential tax consequences.

The control of assets in a trust can be set to allow the beneficiary (in this case, your child) a lot of control (as a sole trustee), some control (a co-trustee with someone else), or no control (as a beneficiary only, without being a trustee).

You can appoint whomever you wish as trustees: a family member, a lawyer, a bank, or someone else, but a trust is only as good as the person or people administering it. You can appoint one trustee or multiple trustees, and you can name a primary trustee and contingent trustees if your first choice predeceases you or decides to decline their appointment.

There is legal recourse if the beneficiary feels that the trustees are abusing their power, but you would rather avoid that if possible. Asking the lawyer who drafts your trust to make the terms as obvious as possible is the best way to accomplish this.

While it is best to let the lawyer draft the verbiage herself, you should tell her that your goals include creditor protection and likely a “spendthrift” provision.

You should also decide if you would like the trust to be stretched out over as long a period as possible, and you can indicate that you would like the trust to provide for the support, health, maintenance, and education of your child only (instead of distributing straight to the child with no stipulations). In other words, the trust can limit what the money is for. This means that the trustees will distribute from the trust what they deem reasonable for things like tuition, books, and room and board, but that the beneficiary would have to convince the trustees that a Ferrari is necessary for his “health and maintenance” before he could spend a large amount recklessly.

The beauty of trusts is that they are very flexible, and an estate lawyer can help you craft a document that will follow your wishes and give you peace of mind.

Photo used under Flickr Creative Commons license.

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Wealth Manager

Austin Fey is a Wealth Manager at Marotta Wealth Management, specializing in charitable giving and asset allocations. She is a regular contributor to our Marotta On Money articles, often giving advice to those just getting started in finance.

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