Are you serious about transferring your wealth safely from one generation to another? Do you wish to keep the spending habits of your children and loved ones in check even after your death? If your answers are yes, consider creating a spendthrift trust. So, what is a spendthrift trust, and why should you create it?

Spendthrift trust explained

It’s a kind of trust used for asset protection and estate planning. This type of trust presents particular protections from the creditors of the trust beneficiary. It could also keep the beneficiary from accessing and using the trust principal amount. A spendthrift trust doesn’t let the beneficiary assign, transfer, pledge or sell his/her interest in the trust to his/her creditors or other persons.

Such a trust is used by a granter who believes that the intended beneficiary isn’t good at handling money and might squander the trust assets and money if he received the assets in one lump sum amount. These trusts may also be used to safeguard the inheritance of an heir in case the heir is subject to some kind of liability through her or his profession or could lose the inherited property on account of divorce or creditor claims. In brief, the trust keeps the trust principal safe and let the beneficiary use the benefits of the principal amount.

How does a spendthrift trust work?

In this kind of trust, the granter places the assets in the trust for the benefit of another individual, called the beneficiary. The granter specifies one or more trustees for managing the trust property and making disbursements to the beneficiary as mentioned in the trust. Although this type of trust safeguards the trust principal, it’s responsible to pay the trustee for his services in administering and managing the trust.

The document of the trust could be drafted to provide income or principal sum or both to the intended beneficiary in various ways. The spendthrift trust may offer all the income from the trust assets at regular time intervals to the beneficiary throughout his life. The trust document could also provide that the intended beneficiary shall get the trust principal upon reaching a particular age.

It may also assert that the trust property shall pass to the heirs or children of the beneficiary upon her or his death. A spendthrift trust can limit the amount of money the beneficiary could receive from the income earned by the trust assets. The trust could also be drafted to allow the trustee the discretion to use the trust principal to meet the extraordinary needs and demands of the beneficiary.

These needs could include educational expenses or medical costs. Some spendthrift trusts may be drafted to allow the trustee the discretion to pay particular expenses directly for the beneficiary. For instance, if the intended beneficiary carries a lot of debts to his name, the trust document may contain a clause allowing the trustee to pay the expenses of the beneficiary rather than making an outright distribution to the beneficiary.

In this way, the principal amount is protected even if the beneficiary is in heavy debt. Also, the beneficiary is able to harness the benefits of the trust income throughout his life. Above all, wealth is safely transferred from one generation to another no matter the economic conditions of the beneficiary/beneficiaries.

Bottom line

If you’re serious about providing lifetime income to your loved ones after your death, consider making a spendthrift trust. To get more info in this respect, check the above details and find out what is a spendthrift trust and how it works. By making a spendthrift trust, you could insure lifetime financial support to your heirs and let them pass the wealth to their descendants.