Saturday December 9, 2023
Trusts for Creative Spenders
Trusts can be quite useful for protecting children. However, for some children, the trust serves an additional function: It protects the principal from being rapidly spent by a child. These trusts have a specific name—they are called "spendthrift" trusts.
Marla was visiting with her attorney Elizabeth shortly after her husband Harry passed away. She shared her concern for her youngest child, Joe.
Marla: "Harry and I were very fortunate to have four great children. I love each one of them very much. However, when it comes time to making decisions about inheritance, I have a big problem. Our older children Sam and Linda are quite good with financial matters. The third child Lynn is average, but our youngest son Joe is very carefree. If Joe has money, it is gone in a flash. What can I do?"
Elizabeth: "This is a fairly common situation. Many parents would like to treat their children equally, but some children are very good managers and one or two are not. In your case, we hope that Joe eventually learns to become more responsible. But for the present plan, it makes good sense to provide Joe with spendthrift trust provisions."
The Spendthrift Trust Concept
A spendthrift trust allows a parent to protect a certain amount of inheritance. If you have a circumstance like Marla, it may be appropriate to transfer inheritance outright to some of your children and the same amount of property into a spendthrift trust for the "creative spender" child.
A spendthrift trust will need to be managed by a trustee who can make good decisions. For a larger trust, this could be a bank or trust company. In many circumstances a private trustee is selected, such as one of the family financial advisors or even one of the other children.
The trustee will have the usual power to invest and manage the trust assets. The first important provision for the trustee is his or her power over income. The spendthrift trust normally includes seven different provisions that apply to the income:
Spendthrift Trusts and Distributions of Principal
With a spendthrift trust, distribution of principal is also subject to specific requirements. While the parents are given a reasonable level of flexibility in setting forth the distribution rules, there are several general guidelines that are usually followed.
A Solution for "Creative Bill"
Sam and Sandy have an estate of $1 million. Their children—Alice, Jim and Bill—are all in their mid-thirties. Alice is age 38 and Jim is age 37. They are both solid and responsible. However, Bill is 33 and is quite a creative person. Sandy says that "If Bill had a million dollars, he would use it creatively in three weeks."
Because of their desire to treat everyone equally and to protect Bill from his creative spending habits, Sam and Sandy created a fairly typical plan for their circumstances. If one spouse passes away, the $1 million estate will be transferred to the survivor. When the survivor passes away, their favorite charity will receive a bequest of 10% of the estate. The other 90% will be divided. Alice and Jim will receive their shares outright. However, the third share will be transferred into a spendthrift trust with family advisor Steven as trustee. There will also be a successor trustee—First Bank from their local community.
As trustee of the spendthrift trust, Steven will receive approximately $300,000. He will invest this amount in a diversified portfolio of stocks and bonds. Steven will have discretion to distribute income and/or principal to Bill. When Bill reaches age 55, he will then receive the full inheritance. Sam and Sandy believe that by that time he will be responsible in managing the property.
Published February 3, 2023