Obviously not everyone in the world is responsible with money, and South Florida can be a hot bed for extreme spending – that yacht isn’t going to build itself. Even those who are moneywise can run into bad stretch of financial in life which could cause them financial hardship. So when planning your estate, you should think about how you are leaving a large sum of money to someone who can’t handle it. For those beneficiaries for whom you have concerns, a spendthrift trust may be an innovative way to protect the money and them.
- If a person who is “bad with money”, or who is going through a rough time, gets a large inheritance, odds are that the inheritance will be gone in a matter of a few months or a year or two, with very little to show for it.
- A spendthrift trust is a trust that is designed to limit a beneficiary’s ability to waste the principal of a trust.
- The beneficiary of a spendthrift trust is a person who can’t handle money, or is addicted to drugs, alcohol, or another negative behavior.
- A spendthrift trust could even be used for someone in a destructive relationship.
- In a spendthrift trust, a sum of money is set aside in a trust account. The beneficiary is never the trustee of a spendthrift trust. Instead, the trustee can be another family member, a family friend, or even a corporate trustee like a bank. The trustee will spend the money for the beneficiary’s needs or could make payments directly to the beneficiary, as the trust document allows. However, the beneficiary has no right to spend the principal of the trust. The beneficiary also doesn’t have the legal right to pledge the trust as security for a loan.
- In some spendthrift trusts, the trustee could have the power to cut off benefits to a beneficiary who becomes self-destructive, such as with the use of drugs or alcohol. The money could then be accumulated for the beneficiary’s use later, or it could be paid to another beneficiary. Another option would be to give the trustee the option to only make payments on behalf of a beneficiary who has become self-destructive, but to withhold cash from that beneficiary.
Spendthrift trusts are a good way to help potential beneficiaries who cannot responsibly handle money for various reasons be it drugs, gambling even disability sometimes. However, they aren’t perfect. They may be too strict in situations where the beneficiary may have a legitimate need for more money. If the spendthrift trust isn’t strict enough about what money is allowed to be spent on, that leaves a lot of control in the trustee’s hands, and he may find himself in the difficult position of standing between an erratic beneficiary and his or her money.