Protect your children with a spendthrift trust

With wealth comes responsibility. All too often, though, people who suddenly come into wealth without preparation don’t make sound decisions, such as the lottery winner who blows through their winnings or the star athlete who ends up with nothing after their playing career is over. In my financial planning practice, I work with a lot of parents whose children will inherit significant wealth. To assist them — and help protect their children from overspending — I often advise them to have the “money talk” to openly discuss the responsibilities that come with wealth. Sometimes, however, the talk isn’t enough, and parents need to take additional precautions with provisions within trust documents.

One common provision is an asset protection trust, which has a “spendthrift provision” along with other protective clauses for the beneficiary of your assets. Like other trusts, asset protection trusts or trusts created with spendthrift provisions can be created currently (inter vivos trust) or upon death through your will (a testamentary trust). With these trusts, the trustee of the will is generally given broad discretionary powers to distribute income and/or principal funds to help your child maintain their lifestyle. Since the trustee — not the child — will have direct access to the principal, you can protect a child who isn’t financially responsible from exorbitant spending …for example, purchasing luxury cars for their new best friends. In addition, you have the flexibility to make the trust for the life of the beneficiary or for a planned number of years. You can also establish discretionary distributions by the trustee as well as mandatory distribution provisions during the beneficiary’s life.

Besides preserving assets, an asset protection trust with a spendthrift provision offers another benefit — safeguarding assets from creditors and from bankruptcy or divorce. Keep in mind, however, that a trust with mandatory distributions may not be the most protective or creditor proof. In such cases, you can put additional safeguards in place that allow the trustee to withhold distributions.

With the complexity and costs that often come with creating and administering trusts, I recommend meeting with an experienced advisor to review your needs and concerns. With proper planning and guidance, you can protect your children from creditors — and themselves.

Working alongside a financial professional can help you navigate the future and reach your potential. To learn how our Wealth Advisors can help you, please call 1.800.670.5400, visit us online, or visit your nearest Citizens branch.