If you are someone with significant wealth, you might have concerns about how your children will spend their inheritance, particularly if they come into it shortly after becoming legal adults. You are not alone in your worries. Other families have dealt with this dilemma by creating a spendthrift trust.
U.S. News and World Report explains that a spendthrift trust is a special kind of trust that allows you to place conditions on how beneficiaries may spend the money they receive from the trust. This kind of trust may help your heirs in important ways.
Protection from bad spending habits
Some parents have children who do not spend money wisely. They might have poor judgment or use the money for alcohol or drugs. A spendthrift trust may prevent your child from blowing an inheritance on frivolous expenses by specifying that they can only spend the money on housing, food, education, an automobile, or familial expenses.
While your children may not have any gambling or addiction problems, they might lack the experience to handle large amounts of money. If you die suddenly when your children are young adults, you will not be around to teach them how to spend and save money. A spendthrift trust could set some spending guidelines conditioned on their young age.
Protection from other parties
By placing money in a spendthrift trust, you could keep it out of the hands of parties who could try to collect from your child. If your son or daughter gets married and then divorced, the ex of your child cannot claim the money in the trust. Similarly, the money in the spendthrift trust should be safe from creditor efforts to collect on the debts of your child.
If you are considering a spendthrift trust for your children, you will need a trustworthy person to act as trustee given the discretionary powers your trustee will have to disperse funds. An ethical trustee who has the best interests of your family at heart can further help guard the inheritance of your loved ones.