Many of us, as parents and grandparents, may have a child or a grandchild that is not responsible when it comes to managing his or her money. A major concern is: what will happen if that child or grandchild were left a significant inheritance through a will or a trust? This child or grandchild will probably spend the inheritance quickly and impulsively, leaving none of it in savings for an emergency. One way to guard against this is to establish a spendthrift trust.
The inheritance for this child or grandchild, through a spendthrift trust, is distributed to a professional trustee such as a bank trust company or to a responsible person who has demonstrated financial restraint in the management of his or her money or in the management of another relative’s money. It is important to require that a person serving as the trustee of a spendthrift trust post a performance bond that can ensure the reimbursement of the trust funds should they be misappropriated by the person serving as a trustee.
The terms of the spendthrift trust may state that only a certain amount of money can be distributed to the beneficiary of the trust every month or every year. The amount of money to be distributed monthly or annually is measured by the projected needs of the beneficiary. This step can ensure that a reasonable amount will be retained by the trustee for subsequent emergencies the beneficiary may incur during his or her lifetime. In almost all instances, the spendthrift trust will be irrevocable. Thus, the beneficiary may not approach the court for a distribution in excess of the monthly allowance or periodic lump sum payments for the life of the beneficiary.
The spendthrift trust could allow the trustee to disburse money in advance of the scheduled time in the event of an emergency the beneficiary incurs. The trustee of the spendthrift trust, however, will have the sole discretion to determine if the requested principal payment is truly necessary for special education, medical expenses, or other true necessities.
Another advantage of a spendthrift trust is that it can state that no creditor or a beneficiary can sue for the assets in the spendthrift trust until the required distribution time. A court will still have the right to attach the beneficiary’s trust assets, however, if the money is needed for child support or alimony.
We know this is a challenging topic for you and your family to face. As parents and grandparents you want your children and grandchildren to be as protected as possible in the future. We encourage you to schedule a meeting with our law firm to discuss your concerns and plan forward in your estate plan to create the legacy planning that is right for you.