As a parent, you will always love your children. However, your children have grown into adults. They lead their own lives and must be accountable for their own actions. While some children develop into financially savvy adults, not every child does. Although you may want to leave your wealth to your children, you may have concerns about the most responsible way to do so.
Age does not necessarily equal maturity or financial sense. Even those with reasonable financial management skills can lose all restraint when they suddenly receive a large amount of money. If you are concerned that your adult children may squander their inheritances, it may be prudent to protect your hard-earned money.
Although you may want to prevent your children from frivolously wasting their inheritances, you do not necessarily need to disinherit them. A spendthrift trust can be a good estate planning tool to ensure each child uses his or her inheritance wisely.
How does a spendthrift trust work?
If you choose to use a spendthrift trust, you can transfer assets into the trust right away or have them flow into the trust after your death. Once you transfer the ownership, a trustee will manage the assets on behalf of your children. You can choose someone who is trustworthy and who has reliable financial sense to serve as the trustee.
With the assets in the trust, an adult child cannot spend all the inheritance at once. He or she can only spend small amounts of the assets at a time. You can set these distributions to occur at certain times in your child’s life, or you can give the trustee the authority to decide when it is appropriate to distribute assets according to the terms of the trust.
Because your child does not directly control the money, creditors cannot take your child’s inheritance to pay off debts. The inheritance also cannot be used to satisfy legal judgments against your child.
Although it may not be necessary or appropriate in all situations, a spendthrift trust may be an effective way for you to take more control over what happens to the money you leave behind. A spendthrift trust can be a great way to protect your money from being misused by your children after you are gone. However, it can also protect your children from themselves.