Part of estate planning is considering the well-being of your children. You want to ensure they have financial security, but you also worry about the mismanagement of funds or threats to the assets.
A spendthrift trust may be a viable solution.
The pros and cons of a spendthrift trust
A spendthrift trust is designed to protect assets for the beneficiary. The grantor (the person creating the trust) dictates the terms under which the trustee can distribute the funds to the beneficiary. What makes a spendthrift trust different than other types of trusts is that the beneficiary can’t access the trust’s assets directly or use them as collateral for loans. Thus, the assets are protected from creditors.
A spendthrift trust offers several advantages if you are concerned about safeguarding your children’s inheritance, including:
Protection against poor financial decisions: Not everyone is prepared to manage a significant amount of money. Without caveats in place, some people may squander money on impulsive purchases and bad investments. With the terms of a spendthrift trust and a trustee overseeing the distribution, the funds will be used wisely over time.
Protection from creditors: Anyone can fall on hard times. If your child has to file for bankruptcy or face legal judgments, the assets within the spendthrift trust are usually protected from creditors seizing them.
Protection during divorce: Michigan is an equitable distribution state, which means marital assets are distributed fairly in a divorce. In some instances, an inheritance may be subject to division, especially if it was in a joint bank account and co-mingled with other marital assets. A spendthrift trust can shield those funds, ensuring they remain solely in the possession of your child.
While there are clear benefits to a spendthrift trust, there are some potential drawbacks, such as:
- Family disputes if a beneficiary feels they should have more control over their inheritance.
- The ongoing expense of having a trustee overseeing the funds can reduce the total value of the trust.
- A spendthrift trust can be complex as it requires careful planning, clear terms and diligent oversight.
The best way to determine if a spendthrift trust is suitable for your children is to discuss your goals with a qualified legal professional. By reviewing your estate planning objectives and financial situation, they can help you determine if a spendthrift trust is a viable solution.