Inheritance Money: Using a Spendthrift Trust to Control Spending by Heirs

Many families have concerns about the spending habits of potential beneficiaries or heirs. If you are worried that your child, grandchild or other beneficiary may be reckless with an inheritance—spending it down within a few months or years after receiving it—there are ways to provide for your heirs' long-term security while also protecting your hard-earned assets.

One option is to create a type of irrevocable trust known as a Spendthrift trust. A Spendthrift trust puts restrictions on withdrawals. For example, you can give the beneficiary a monthly allowance and/or periodic lump sum payments for life or until the funds are fully disbursed.

Spendthrift trusts sometimes contain provisions permitting the trustee to distribute money ahead of schedule but only for specific purposes such as education, medical expenses or other necessities but not for fancy cars, luxury vacations or extravagant parties. Thus, it is important that you choose trustees who are not likely to be influenced by your beneficiaries.

A properly constructed Spendthrift trust protects the proceeds you leave the beneficiary from possible claims by his or her creditors. In general, creditors cannot access any of the Spendthrift trust assets until they are distributed to the beneficiaries although they sometimes can be tapped to pay for alimony or child support.

A less elaborate alternative to creating a Spendthrift trust might be to purchase an annuity, with the payments going to your chosen beneficiary for his or her lifetime or for a fixed period such as 20 years. The annuity's guaranteed income stream helps ensure some measure of financial security for the beneficiary. So long as the beneficiary is not made the owner of the annuity, he or she is not able to readily convert that long term income stream to cash.

Creating a Spreadthrift trust is not a do-it-yourself project, and you will need a knowledgeable attorney who can tailor your wishes into a binding legal document that will comply with the appropriate state laws. If you choose, instead, to purchase an annuity, it is important to compare the products offered by more than one provider.