Planning for the Spendthrift Child

Let's Talk about......Planning for the Spendthrift Child
By: Alan Orlowsky

One of the main reasons our clients get involved in estate planning is to provide loved ones with protection from claims of future creditors, and “predators” such as divorcing spouses or lawsuits. If you leave your property to your child as an outright distribution, the property will not be protected from these things, but by using well-designed trusts, many protections are available. However, in some families, protection of assets from outside forces is not as important as protection from the child who is receiving the inheritance!

 

What is a parent to do when they want to treat children equally, but are afraid that one of the children will waste their inheritance within weeks or months of inheriting it? There is a longstanding concept in trust law known as “spendthrift” protection. These are provisions which provide that the Trustee will have sole control to make distributions from the trust without interference from others. The spendthrift clause prevents a third party (creditor or “predator”) from being able to compel the Trustee to make distributions of trust property.

Under the spendthrift rules of most states, a person is free to leave assets in trust for another person, with specific language in the trust specifying who, besides a trust beneficiary, can have access to the trust assets. If the trust includes a “spendthrift” clause that specifically states that trust income and principal is not to be available for payment to a trust beneficiary’s creditors, then as a general rule the trust would be immune from attack by a beneficiary’s creditor. This sweeping protection would apply regardless of the amount or nature of a beneficiary’s liabilities, and would include protection of the trust assets if the child were to go through a divorce.

However, the extent of protection offered by a trust with a spendthrift clause will depend upon state law. Under some states, certain creditors are still allowed access to a trust. This could include a beneficiary’s obligations for alimony or child support, or payments to creditors who have provided certain “necessities of life” to the beneficiary.

For even stronger protection, your trust can be very specific on how and for what purposes funds are to be distributed. For example, you might specify that distributions will be made to your child on the condition that your child remains gainfully employed or, if unemployed, that your child is demonstrating steady progress toward becoming gainfully employed. You can also establish guidelines in your trust that provide that trust funds are to be used for funding non-luxury items, such as a used but safe car for transportation, and only if the beneficiary is able to pay for the ongoing maintenance and insurance of the car.

You can use very conservative distribution guidelines that allow the Trustee to make distributions solely based on demonstrated need. When combined with incentive provisions that allow the Trustee to pay for expenses that enhance a beneficiary’s career, such as funding further education, a child’s dependency over trust funds can be controlled.

If you have questions about this post or about a particular legal situation, visit out website www.orlowskywilson.com or please contact Alan Orlowsky by calling 847-325-5559.