How To Stop Heirs from Wasting Inheritance?
This is a problem solved by a trust—a “spendthrift” trust. With a spendthrift provision in a testamentary trust created under a will or an inheritance trust created under a revocable living trust, the trustee makes all decisions about distributions. This can be an effective means of controlling the flow of money.
A spendthrift trust, according to the article “Possible to spendthrift-proof a trust” from Record Courier, is created for the benefit and protection of a financially irresponsible person.
For a spendthrift trust to stop heirs from wasting inheritance, it may be better not to choose a family member or trusted friend to serve as the trustee. Such person might not live long enough or have the capacity to serve as trustee for as long as required, especially if the heir is a young adult. Conflicts among family members are common, when money is involved. An independent and well-established trust company or bank may be a better choice as a trustee. Large estates often go this route, since their services can be expensive. However, some retail banks do have a private wealth division. All options need to be explored.
Another benefit to a spendthrift trust—funds are protected against current or future creditors of the beneficiary. Let’s say a parent wants to leave money to a child, but knows the child has credit card debt already. Unless they are co-signers, the parent and their estate do not have a duty to pay an adult child’s debts. The spendthrift trust will not be accessible to the credit card company.
It is difficult to set up a spendthrift trust to protect one’s own money from creditors. This is something that must be approached only with an experienced estate planning attorney. This is because the rules are complex and there are significant limitations.
A spendthrift provision in a will is a clause used to protect a beneficiary from a creditor attaching prior debts against the beneficiary’s future inheritance. This means that the creditor may not force an heir or the estate’s executor to pay the beneficiary’s inheritance to the creditor, instead of the beneficiary. It also prevents the beneficiary from procuring a debt based on a future inheritance.
It is important to be aware that a spendthrift provision in a will or a spendthrift trust has limitations. The assets are only protected when they are in the trust or in the estate. Once a distribution is received, creditors can seek payment from the assets owned by the beneficiary.
Another qualifying factor: the spendthrift provision in the will must prevent both the voluntary and involuntary transfer of a beneficiary’s interest. The beneficiary may not transfer their interest to someone else. If they can transfer their interest, it will not stop heirs from wasting their inheritance.
The spendthrift trust and clause are mainly intended to protect a beneficiary’s interests from present and future creditors. They are not valid if their intent is to defraud others and may not be created to avoid paying any IRS debts.
To stop your heirs from wasting their inheritance you will want to discuss with me, Ted Vicknair your estate plan. I can help set up a spendthrift trust to stop your heirs from wasting their inheritance and protect your assets from your heirs’ creditors and predators. BOOK A CALL today.
To read other articles on estate planning, check these out: What are the Most Popular Estate Planning Scams? and What Is the Required Minimum Distribution for 2021? and Who Receives an Inherited IRA after the Beneficiary Passes? and Will Democrats Pass Medicare Expansion?
Reference: Record Courier (July 10, 2021) “Possible to spendthrift-proof a trust”