Spendthrift Trust Protects Heirs from Themselves

Orange City Iowa Estate Planning

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What steps can be put into place to ensure an adult child, who makes poor decisions, will be secure after the death of the parent? The main asset is life insurance.

“How can I protect my kids from spending all their money at once?”Photo of kids who can benefit from a spendthrift trust

This is not an unusual question for most estate planning lawyers—and in most cases, the children aren’t bad. They just lack self-control or have a history of making poor decisions. Fortunately, there are solutions, as described in a recent article titled “Estate Planning: What to do to protect trusts from a spendthrift” from NWI.com.

What needs to happen? Plan to provide for the child’s well-being but keep the actual assets out of their control. The best answer is the use of a trust. By leaving money to an heir in a trust, a responsible party can be in charge of the money. That person is known as the “trustee.”

People sometimes get nervous when they hear the word trust because they think that a trust is only for wealthy people or that creating a trust must be very expensive, but that’s not necessarily true. In many states, a trust can be created to benefit an heir in the last will and testament. The will may be a little longer, but a trust can be created without the expense of an additional document. Your estate planning attorney will know how to create a trust in accordance with the laws of your state.

When the trust is created in the will, it’s called a testamentary trust. Instead of leaving money to Joe Smith directly, the money (or other asset) is left to the John Smith Testamentary Trust for the benefit of Joe Smith.

The terms of the trust are defined in the will and can be created to accomplish your goals. For instance, you can decide to distribute the money over a period of time. Funds could be distributed monthly to create an income stream. Or, they could be distributed only when certain benchmarks are reached, such after getting married, a full year at a job, graduating college, or after having a child. This is known as an incentive trust.

If the funding for the trust will come from proceeds from a life insurance policy, it may be necessary to have your estate planning attorney contact the insurance company to be sure that the insurance company will permit a testamentary trust to be the beneficiary of the life insurance and avoid probate altogether.

Not all insurance companies will permit this. There may be some other changes that need to occur for this to work and be in compliance with your state’s laws. However, your estate planning attorney will be able to resolve the issue for you.

Reference: NWI.com (May 17, 2020) “Estate Planning: What to do to protect trusts from a spendthrift”

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