There are many different tools in the estate planning toolkit, so you should be aware of all of your options so that you can make the right choices. A lot of people assume that there are certain risks that must be taken, but for the most part, this is not the case at all.
This dynamic can enter the picture when it comes to leaving an inheritance to a loved one that is not very good at managing money. If you leave a lump sum inheritance, the individual could burn through it very quickly, and you will not be around to provide additional support when it is needed.
Let’s look at a very effective strategy for protecting an inheritance that you may want to leave to a family member that could be described as a spendthrift.
Revocable Living Trust
A revocable living trust is an estate planning device that provides a host of benefits, but we are going to focus on the protective element here. The anatomy of a living trust starts with the grantor, which is the person creating the trust.
If you are the grantor of the living trust, you can act as the trustee, which is the trust administrator. The beneficiary is the individual that can receive monetary distributions from the trust, and you can be the initial beneficiary.
In the trust declaration, you name successors to assume these roles after your passing. Under this scenario, your spendthrift heir would be the beneficiary, and a person or entity of your choosing would be the trustee.
We are using the term “entity” because trust companies and the trust sections of banks provide trustee services. They charge fees, but it can be money well spent if the trust is sufficiently funded and it is going to remain intact for an extended period of time.
After your death, the trust would become irrevocable, and you can include language that prevents the beneficiary from directly touching the assets. In the trust declaration, you leave instructions with regard to the way that you want the trustee to distribute assets to the beneficiary.
For example, let’s say the trust contains assets that are income producing. You could leave the principal intact while you allow the trustee to distribute the earnings from the trust on a monthly basis.
Many people will give the trustee the latitude to make additional discretionary distributions under certain circumstances. Since people tend to mature over time, you could allow for lump sum distributions of portions of the principal when the beneficiary reaches certain age thresholds.
Through the terms of a spendthrift provision, generally speaking, the creditors of the spendthrift beneficiary would not be able to touch the principal. Once assets from the trust have been distributed to the beneficiary, they become the property of the beneficiary. At that point, they would not be protected.
No-Contest Clause
There is another move that you can take to add a layer of protection against a potential estate challenge if the beneficiary may not be happy with the terms. You can include a no-contest clause that would disinherit the beneficiary entirely if a contest is initiated.
This would not absolutely prevent the beneficiary from contesting the terms, but it is a risk that most people would not want to take.
Attend a Free Webinar!
We are very committed to education, because we want people to understand why estate planning is so important. These efforts also extend to the elder law arena, because you should brace yourself for potential long-term care costs that can consume your legacy.
There are hundreds of posts on this blog that cover a wide array of different topics, and there are other written resources that you can access on our website. Plus, we have traditionally held seminars on an ongoing basis to provide in-person presentations to members of the community.
Because of the impact of the novel coronavirus, we are not offering in-person seminars for the time being, but we have adapted. Our information sharing sessions are now delivered through webinars, so you get the same experience from the comfort of your home.
There is no charge at all, but registration is required. Click here to see a list of our upcoming webinars and to register.
- What Is Probate and Why Do People Avoid It? - March 30, 2023
- The Lessons from Lisa Marie - March 28, 2023
- Living Trust Bank Accounts and FDIC Insurance (VIDEO) - March 21, 2023
