Just a few weeks ago here on the AgingOptions blog, we shared some helpful advice about the right approach to giving money to your family members. The gist of the article (you’ll find it here) is that there’s a right way – and a wrong way – to give resources away, and if you want to keep the peace there are certain precautions and preparations you need to bear in mind in planning your estate.
A Spendthrift Trust is Not Just for Those with Spending Problems
But what if you have genuine concerns about how well your beneficiaries might handle their newfound wealth after you’ve passed away? In that case, you might be interested in this recently-published article from Kiplinger. It’s titled, “How to Keep Your Heirs from Blowing Their Inheritance,” and the point of the article, written by estate planning attorney Philip Ruce, is to introduce us to something called a spendthrift trust. “Spendthrift trusts may sound like you’re trying to keep your kids from frittering away your legacy,” says Luce, “but they are not just for those with spending problems. They’re useful in cases of divorce, substance abuse or where beneficiaries are young or financially inexperienced.”
The point of a spendthrift trust is clear: you’ve worked hard to build a legacy for your heirs, and you want to bless them – but you may have genuine and well-founded concerns about how they will spend the money once they get their hands on it. “We all want what is best for our children,” Luce writes in the Kiplinger article. “We work hard to provide for them while we are here on Earth, and the estate planning process ensures we continue to provide for them once we are gone. But, of course, it’s not always as simple as that.” We hope we’ll be able to leave an inheritance (large or small) to our children, but even if they’re adults, they may not be money-smart. In fact, their choices may suggest quite the opposite. Just because they’re your designated beneficiary, it doesn’t necessarily mean they should have easy or immediate access to any or all the money you are leaving to them.
A Spendthrift Trust Can Help Guard Against Financial Immaturity
“Adult children may not be ready to handle a significant inheritance due to a variety of reasons,” Luce states. “They could be financially immature and unable to budget their money. They could be involved in an unhealthy relationship with little say or control over their financial matters. They could have addiction issues and be unable to cope. Or they could simply be too young. Providing a large sum of money to an heir in any of these scenarios could have disastrous results.” The truth is, he adds, that many people “just aren’t equipped to deal with receiving a large sum of money all at once.” (Lottery winners standing in front of the news cameras with their oversized checks come to mind.) “Their intentions may be good, but sadly, many of them end up going broke and filing for bankruptcy.”
Enter the spendthrift trust. “A spendthrift trust protects your heirs from themselves by providing a trustee with the authority to control how the beneficiary can use the funds,” Luce explains. “A trust becomes a spendthrift trust when the creator includes specific language indicating the trust qualifies as such, and by including limitations to the beneficiary’s control of the funds.” Placing funds in a spendthrift trust protects assets from creditors, because the beneficiary doesn’t directly own the assets – and it also helps guard funds against divorces, lawsuits and bankruptcies. A spendthrift trust “can keep money away from manipulative family members and friends, too.”
Setting Up a Spendthrift Trust Starts with an Estate Planning Attorney
Setting up a spendthrift trust starts by meeting with an estate planning attorney who will help you determine whether this approach makes sense for you and your heirs. The attorney will want to know what it is you’re trying to accomplish, how long the trust will be in force, and who the trustee should be. As grantor of the trust, you decide how much power to give the trustee and how much discretion he or she will have. Luce gives this example. “Let’s say a grantor has given the trustee full control over the trust if the money is used for Jonny’s college tuition. The trustee can write a check for tuition payments each semester with no conditions whatsoever, or the trustee can put certain conditions on Jonny’s academic performance and pay his tuition if he maintains a certain GPA or graduates within a specific time frame.” The terms of the trust can be specific to your family situation.
Naming the trustee is a pivotal decision, says Luce. “Although you can appoint anyone over the age of 18 to be the trustee of your spendthrift trust, you’ll want to carefully consider the person you choose to do the job. You can hire a professional firm, bank, or investment company to do it for a fee, or you could appoint a family member or friend.” But if you decide to make the trustee someone well-known to your family, be careful. “If you appoint a family member as the trustee, keep in mind any family dynamics that might come into play between the trustee and beneficiary,” Luce warns. “You don’t want things to turn ugly or be uncomfortable. As I say to my clients, Thanksgiving dinner becomes quite uncomfortable when Uncle Joe stops being just ‘Uncle Joe’ and begins to be ‘Uncle Joe who has my money.’”
The Real Key to a Solid Estate Plan: an AgingOptions LifePlan
While the Kiplinger article focuses on one fairly narrow issue, it’s a good start: financial planning is an important component of retirement planning. But people heading towards retirement often make the mistake of thinking that a little financial planning is all that’s required, when in fact most financial plans are woefully inadequate. What about your medical coverage – will that be adequate? What if you have to make a change in your housing status – will that knock your financial plan off course? Are you adequately prepared legally for the realities of retirement and estate planning? And is your family equipped to support your plans for the future as you age? The best way we know of to successfully blend all these elements together – finance, medical, housing, legal and family – is with a LifePlan from AgingOptions.
We invite you to join the thousands who have discovered the power of LifePlanning by attending a free LifePlanning Seminar at a location near you. Invest just a few hours and you’ll come away with your eyes opened to a brand-new way to think about retirement. You’ll find a calendar of upcoming seminars here on our Live Events page – then register online or give us a call. Make certain your retirement planning is truly comprehensive and complete: come discover the power of an AgingOptions LifePlan. Age on!
(originally reported at www.kiplinger.com)