Spendthrift Trusts

SUPPOSE YOU PLAN TO leave a healthy sum to your adult children, but you are worried they will quickly fritter away the money. Perhaps they have a problem with drinking, drugs or gambling. Perhaps they spend compulsively. Or perhaps you fear the inheritance will make them the target of scams and lawsuits.

One possibility is to leave money for their benefit in spendthrift trusts, from which the beneficiaries have no right to make withdrawals. Instead, money is only disbursed according to the terms you have drawn up. You can even specify that the trust shouldn’t disburse money and instead should use its assets to pay certain living expenses for the beneficiary.

Because the beneficiary isn’t allowed to make withdrawals, the assets should be protected from creditors if, say, the beneficiary is subject to a lawsuit or ends up in debt. Still, you will likely want the trust to disburse some money each year or purchase some goods and services for the beneficiary. As explained in the earlier section on children’s trusts, a trust can find itself paying taxes at a steep rate if it retains even a modest amount of income.

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