We’ve all heard about the lottery winners who were broke just a year or two after winning millions. And if you’re in a position to turn a loved one into the equivalent of such a lottery millionaire and yet you know they’re not good at handling money, those lottery winners will give you pause.
You want to help them out, but you don’t want them to squander their money. Worse, there are others after them who might even take their money away before your loved one can squander it. What can you do?
You’re in luck! You CAN financially take care of them while also protecting them from their spendthrift ways. That’s because there is such a thing as a spendthrift clause you can attach to the trust you set up for them. Let’s start at the beginning.
Setting Up a Trust with a Spendthrift Clause
Let’s say you’re in a position to provide that financially irresponsible loved one with a big trust fund. You know that left to their own devices, they would squander it in no time at all. And considering their financial history and the debt they have accumulated, they’d probably have help in the form of creditors who would try to get all that borrowed money back sooner rather than later.
So just handing over that million dollars or however much it may be wouldn’t do them a whole lot of good long term. Sure, they might enjoy the windfall for a little while, but then they’d be as broke as ever. Yet the whole point of giving them the money would be to take care of them for the duration.
That’s what trusts are for. They allow you to secure and protect assets for the long term. Even better, there are also ways to ensure that the money won’t disappear overnight. And for your situation, that would be including a spendthrift clause in the trust.
In fact, you’re far from alone in this situation. A lot of people who want to leave their children a substantial amount of money put provisions in place that prevent the children from spending it all right away. Instead, it gets doled out over time, allowing them to enhance their financial situation without allowing any kind of overspending.
How to Set Up a Spendthrift Trust
First of all, you find an experienced spendthrift trust attorney or an estate planning attorney with experience with spendthrift clauses. Call for a free consultation, find someone you like and trust and who you feel comfortable with, and get the help you need to set up that trust.
For the time being, you’re going to be the trustee, but you also have to put someone in place who’ll be able to take over if something should happen to you, someone who will continue to administer the trust according to your wishes.
As the trust is being set up, you add to it a spendthrift clause, something that exists for exactly the kind of situation you’re in: to provide money on an ongoing basis to someone who is, shall we say, financially irresponsible.
The spendthrift clause will protect all kinds of assets that are in the trust, including real estate, cash, and stocks. Some of these assets could also be income-producing, such as rental properties and dividend-earning stocks. And with a spendthrift clause, that income will also be protected.
How a Spendthrift Trust Works
The amount that the beneficiary receives, is doled out on a regular basis. And, very importantly, he or she cannot borrow against future amounts or give them away. In addition, the trust’s assets are protected against the beneficiary’s creditors.
In fact, a spendthrift clause must contain specific language to protect those assets. That’s why it is so important to get the help of an experienced lawyer.
How to Hand Over the Money
The trust can specify how and in what intervals the money should be handed over, For example, the beneficiary could get the money once a month. However, there is also a choice to make whether to give the money to the beneficiary directly, to do with as they please, or to pay some bills on their behalf, such as their rent.
Debts That Cannot Be Avoided
While a spendthrift trust can protect your spendy beneficiary from creditors, there are some debts that the trust cannot protect against. These include alimony, child support, and certain government claims. Laws also differ from state to state on which kinds of funds are and are not protected from creditors.
More Uses of Spendthrift Provisions
Spendthrift provisions in trusts are actually used more widely than just to protect financially challenged offspring from their own overspending.
In fact, a lot of trusts have such a clause in order to protect the beneficiaries from creditors. In order to do so effectively, the trust must be irrevocable.
What You Should Do
Let’s say you’re looking to protect your assets and also pass them on to your loved ones, some of whom may not be very financially prudent. You want them to be provided for but you don’t want them to squander their money. So a trust with a spendthrift clause may be your perfect solution.
If you are in that situation, your next step should be to find a good estate planning attorney with plenty of experience with spendthrift clauses and provisions. We have that kind of experience. Call us today for a Consultation, and we’ll be happy to talk with you and help you set up your trust with a spendthrift clause for your loved ones.