If you have someone in the family that is a poor money manager, you may have serious reservations when you are devising your estate plan. This individual may burn through their inheritance quickly and be left with nowhere to turn in the future, and this can definitely be a cause for concern.
Fortunately, they are steps you can take to protect a spendthrift heir, and we will look at a commonly embraced solution in this post.
Revocable Living Trust
Under these circumstances, you can establish and fund a revocable living trust. You do not have to worry about any loss of control while you are living, because you would have the power of revocation. As the grantor of the trust, you can also serve as the trustee and the beneficiary initially.
The family member that you want to provide for after your death would be the successor beneficiary, and you would name a trustee to administer the trust when you are gone. This can be a trusted person that you know that is good with money, but there is another option that can be preferable.
Trust companies and the trust departments of banks provide trustee services. Obviously, there is an expense involved, but it can be the right choice if the trust is well-funded and it is going to remain viable for an extended period of time.
You can include verbiage in the living trust declaration to protect a spendthrift on a couple of different levels. First, after you die, the trust would become irrevocable. The beneficiary would not have direct access to funds in the trust, so there would be an inherent safeguard.
In the trust declaration, you leave instructions with regard to the nature of the distributions that will be meted out to the beneficiary. You could provide a certain amount each month, or it could fluctuate depending on the performance of income producing assets that are held by the trust.
A properly worded spendthrift provision would protect the principal from the beneficiary’s creditors in most cases. To account for assets that may remain in the trust after the death of the beneficiary, you can name a successor beneficiary.
In some cases, a person that receives an inheritance with strings attached may not be very happy with that arrangement. It is possible to file a suit to challenge the terms of a living trust. However, the plaintiff would have to prove that the trust terms were established under circumstances that were not legally binding.
If you include a no contest clause, it would disinherit a beneficiary that challenges the terms of the trust. The individual can still go forward and give it a try, but they would be risking their inheritance. This type of clause would serve as a very powerful disincentive.
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