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Why you might fund a spendthrift trust for one of your heirs

If you are the parent of adult children, you may be struggling to plan the fair distribution of your estate given the wide spectrum of aptitude and abilities of the heirs. For instance, some of your brood may be quite responsible and sober-minded while one or two others have trod quite far off of life's beaten path.

When such is the case and you have children with wildly disparate ideas about how to manage money and meet their financial commitments, you might have to engage in a little creative estate planning.

Protect your heirs from their worst inclinations

There is one school of thought regarding estate planning that says what your heirs do with any largesse that you leave for them is their business and their responsibility to manage — or not. But the other school of thought counters that it would be irresponsible for any parent to leave a large sum of money to a child who has repeatedly demonstrated they are too irresponsible to properly manage the inheritance.

For instance, if you have an adult child who struggles with addiction or dependence to either drugs or alcohol and that child gains access to a large amount of cash upon your demise, it is possible that any inheritance might eventually lead to a fatal overdose. No parent or grandparent would want to posthumously be a part of such a scenario. Ditto for a situation that involves an heir drinking, driving, and killing or maiming themselves or an innocent bystander or motorist.

Bad money moves can be sidestepped

Sometimes, your heirs may be perfectly sober but still make egregious errors by mismanaging their money. If your adult children have left behind a string of bankruptcies, liens and bad debts, it's highly likely that they lack the skills and aptitude to effectively manage any inheritance you'd like to pass on.

Fortunately, this situation does not have to result in your disinheriting your less responsible heirs. You can alternatively provide for them by funding a spendthrift trust. These function and are legally treated much like regular trusts except that the disbursements and management of the funds are overseen by a trustee so your beneficiary cannot deplete the principal or access the funds.

Spendthrift trusts can also be used when an heir is married to a spouse who has made questionable financial decisions during the marriage. These funds are also protected from being split in any subsequent divorce proceedings, with the exception of disbursed funds that are then commingled by the heir with the marital funds.

Could there be drawbacks?

Certainly, as there are drawbacks with many of life's most important decisions. For one, you are sending a strong message to your heir that either they or their spouse cannot be fiscally trusted. That can be quite a negative final message to send, which is why many estate planning attorneys urge their clients who fund spendthrift trusts for their heirs to have frank discussions with their heirs to apprise them of this decision.

Many heirs will actually be relieved that they are freed from the onus of being financially responsible for their inheritance. Others may be resentful, especially if more responsible heirs don't face such constraints. However, hashing it out now could potentially encourage your heirs to become more fiscally responsible in the future despite your eventual decision. Regardless, discussing your intentions now allows everyone the opportunity to clear the air about the choice.

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