You have worked hard to earn the assets you now have, and you may want to pass those assets on to your adult children after you are gone. However, there might be a nagging concern at the back of your mind.
One or more of your children may not be as financially responsible as you are. You might worry that they will squander any assets they inherit.
Fortunately, there may be a way you can protect your child from himself or herself. You may consider creating a spendthrift trust.
How does a spendthrift trust work?
A spendthrift trust is a type of irrevocable living trust. The assets you put into the trust will be managed by a trustee on your child’s behalf.
The way the trustee manages the assets will depend on the terms you set up for the trust. Usually, a grantor will have the trustee distribute a small amount of money to the beneficiary throughout the beneficiary’s lifetime.
Distributing the assets in small amounts over time means that your child never controls the total sum at once and cannot spend assets that the trustee has not yet distributed to him or her. This is how a spendthrift trust can prevent your child from:
- Blowing the total inheritance on frivolous purchases
- Wasting large amounts of their inheritance on alcohol, drugs or gambling addictions
- Burning through their inheritance quickly with an unsustainable lifestyle
- Losing their inheritance to creditors
- Splitting their inheritance in a divorce
As a parent, you are well aware of your child’s strengths and weaknesses. If money management has never been your child’s strong suit, it may be best to take precautions. There may be more than one way to prevent your child from squandering his or her inheritance, but a spendthrift trust could be the best option for your situation.