When you are contemplating your legacy, you will naturally consider the proclivities of your heirs. You may have no problem with the idea of leaving a lump sum inheritance to a responsible adult child. At the same time, there are those who can be described as “financially challenged.”
With this in mind, a lot of people wonder if a trust can protect heirs from wasting money. The answer is yes, as long as you create the right type of trust with the appropriate terms.
Revocable Living Trust
One commonly embraced option is the revocable living trust. First, contrary to the myths that circulate about trusts, you don’t lose control of assets in this type of trust. While you are living, you will be the trustee, so you can do anything you want to do with the trust resources.
You can change the terms at will, add additional property to the trust, or dissolve it entirely. There is total flexibility, but it is a very effective estate planning tool that can spring into action after your death.
Spendthrift Protections
Let’s say that you create a single living trust for someone who is not good with money. You can include spendthrift provisions, and the trust would become irrevocable after your death.
Creditors of the beneficiary would “step into their shoes” in a legal sense. The beneficiary would not be able to directly access the principal that is held by the trust. As a result, this dynamic would also extend to their creditors, so there is built-in asset protection.
Regarding the spending safeguards, you set the terms as you see fit. You can give the trustee the discretion to provide distributions based on circumstances that you determine in advance.
Some people will allow for a specified monthly distribution amount until the beneficiary reaches certain age milestones. The terms are up to you, and this can provide peace of mind if you’re looking for a trust to protect heirs from wasting money.
Sub-Trusts
If you want to create a trust with different terms for different beneficiaries based on their tendencies, you can do this with sub-trusts. You create a single master trust, and there can be sub-trusts with unique terms for the respective beneficiaries.
Incentive Trusts
An incentive trust is another option that can provide a solution in some circumstances. For example, suppose you want to leave an inheritance to a grandchild or great-grandchild to be used for education.
You can create and fund an incentive trust with terms that guide the beneficiary. The trust can be set up to pay for college expenses as long as the beneficiary remains a student in good standing.
Some people will go a step further to instill a work ethic. They will instruct the trustee to provide a dollar-for-dollar match of money earned on the job after graduation. This is one scenario, but an incentive trust can be utilized to set a broad range of conditions that must be met before assets are distributed.
Food for Thought
You are trying to protect your loved ones when you set up guardrails. However, they may feel resentment when they learn that they are not being trusted with their full inheritance. This can be exacerbated if siblings are not treated the same way.
It is important to keep this in mind when you are devising your plan. There are things you can do to take the sting out of the restrictions, such as allowing for a modest partial inheritance shortly after your passing. You can also include an honest, heartfelt letter to explain your decisions.
We Are Here to Help!
When you work with our firm to put a plan in place, you will be aware of your options so you can make informed decisions.
If you are ready to get started, we have a Westport, CT estate planning office, and another one in Glastonbury, and you can call us at 860-548-1000 to schedule a consultation at either location.
You can use our contact form to send us a message, and if you would like to learn more about this important process, join us at an upcoming seminar.
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