How to Put Limits on Spending by Your Heirs

The spending habits of potential beneficiaries or heirs may be of concern to families in Fort Wayne, Indiana and around the country who are developing their estate plans. There are tools available to prevent an heir from spending their inheritance too rapidly.

One such tool is a type of trust known as a spendthrift trust, which is irrevocable. A spendthrift trust restricts the amount and timing of distributions to the beneficiary. For example, the trustee may be limited to distributing no more than a fixed monthly payment to the beneficiary during the beneficiary’s lifetime. This fixed monthly distribution could be exhausted during the beneficiary’s lifetime, at which point the trust would terminate. Beyond fixed lump sum payments, the trust may direct the trustee to distribute additional funds for specific purposes such as education and medical expenses. Since these additional expenses require a degree of discretion as to their legitimacy, appropriateness, and frequency, careful consideration must be given to the selection of a trustee. Your designated trustee should able to evaluate and remain free from undue requests or demands by the beneficiary.

Another benefit of a spendthrift trust is that trust assets set aside for the beneficiary are protected from possible claims by the beneficiary’s creditors. This protection varies depending on state law. Consulting an estate planning attorney who is knowledgeable regarding applicable state laws will help you create a legally binding document. In most cases, a beneficiary’s creditors cannot reach any of the spendthrift assets until the trustee distributes funds to the beneficiary. However, depending on state law, the beneficiary’s assets may be subject to alimony and child support claims.

An alternative to creating a spendthrift trust is to purchase an annuity with the principal amount that would otherwise have been turned over to a trustee. Financial instruments like annuities create by contract payments to a designated beneficiary for a fixed period, such as a term of years, or for the beneficiary’s lifetime. Many annuities are guaranteed and therefore provide some measure of security for the beneficiary. Someone other than the beneficiary should own the annuity in order to prevent the beneficiary from withdrawing the principal amount of the annuity in a lump sum.

Spendthrift trusts should be created with the advice of an estate planning attorney to ensure your restrictions designed to protect the beneficiary are not overturned. If you choose an annuity, you should investigate and compare a number of investment products so that you are comfortable the annuity will ultimately satisfy your investment and estate planning goals.