For years, you have watched your adult children with their money habits. Two are diligent savers and investors. However, your youngest child has displayed money mishaps that have driven him deep into debt.
This development obviously concerns you, as you keep it in mind while creating your estate plan. What can you do? Create a trust that includes a spendthrift clause – a defense mechanism that protects the trust’s assets from creditors and more importantly from the beneficiaries who will be unable to blow their inheritance.
Keeps creditors at bay
You want your adult children to benefit from your estate, but you do not want disastrous results. As the grantor, you created this spendthrift trust and have assigned a trustee who will distribute the assets per your instructions, while setting limitations.
A spendthrift clause comes in handy when dealing with beneficiaries who may be financially immature, going on extensive and unnecessary shopping sprees. It may also include instructions to stop distributions to an adult child who has an addiction to drugs or gambling — expensive habits that lead to financial downfalls.
And since the assets within the trust are not directly owned by beneficiaries, this money, too, is out of reach of creditors. Remember, though, once money is out of the trust, it is fair game for creditors.
In general, a spendthrift trust also remains protected from lawsuits, bankruptcies and divorces. It also shields money from conniving and manipulative family members.
Doing the right thing
As long as a spendthrift clause is in place, the principal of the trust remains intact, protecting the money from creditors and placing moratoriums on certain financial behaviors of your children. Some beneficiaries may not be happy, but they should wake up years down the line, understanding that you did the right thing.