A carefully thought out and properly drafted estate plan can accomplish many goals. It can also give you peace of mind knowing that your loved ones will be financially secure if anything happens to you. Sometimes, however, simply handing a beneficiary money or other assets is not a wise idea, especially if that beneficiary has a history or reckless spending. The good news is that your estate plan can address this common problem. To better explain, the Indianapolis attorneys at Frank & Kraft discuss the spendthrift beneficiary and how to protect the assets you pass down from reckless spending.
The Problem: A History of Reckless Spending
A primary objective of your estate plan is likely ensuring that a spouse, children, or other loved ones are financially secure in the event of your death or incapacity. Often, reaching that objective is as simple as passing down assets in your Last Will and Testament or naming the person(s) as the beneficiary of a life insurance policy. Things become more complicated, however, if the beneficiary has a history of poor money management and/or reckless spending. In that case, handing your loved one a significant amount of money and/or valuable assets could be akin to throwing the assets in the trash. Not only may your hard-earned money be wasted, but your loved one will be left in dire financial straits sooner rather than later. When you know that a beneficiary has exhibited less than stellar money management skills, it is crucial to account for your spendthrift beneficiary within your estate plan to protect your assets and the beneficiary.
How Can a Spendthrift Trust Help?
When you know that a beneficiary needs to be protected from his/her own reckless spending tendencies, passing money or assets down in your Will should not be an option. Instead, a trust should be used to distribute assets intended for a financially problematic beneficiary. In addition, a spendthrift provision should be included in the trust agreement to provide additional protection.
A trust offers several important advantages over a Will when the goal is to provide for a beneficiary who lacks financial control. First, passing money down using a trust can be accomplished using staggered distributions instead of handing the beneficiary a lump sum of money. Because you create the trust terms, you can arrange for distributions as often as you see fit. Smaller, more frequent, distributions typically work better with a spendthrift beneficiary because they never have a large sum of money at one time. The other huge advantage to using a trust is the ability to appoint a Trustee to manage the trust assets. You have the option to give your Trustee considerable discretion when deciding to authorize distributions, effectively providing another layer of protection against reckless spending.
Including a spendthrift provision in your trust agreement further protects both your beneficiary and the trust assets. A spendthrift trust or provision within a trust acts to protect the trust assets from claims made by creditors of a beneficiary or other third-parties. While there are a few exceptions, this means that a beneficiary’s reckless spending habits cannot result in a creditor putting a lien on the trust to satisfy a debt of the beneficiary. A spendthrift provision can also prevent a beneficiary from encumbering or selling his/her interest in the trust.
Do You Need Help with a Spendthrift Beneficiary?
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to protect assets from a spendthrift beneficiary, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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