Estate Planning Blog Articles

Estate & Business Planning Law Firm Serving the Providence & Cranston, RI Areas

How Do I Stop Heirs from Foolishly Wasting Inheritance?

This is a problem solved by a trust—a “spendthrift” trust. With a spendthrift provision in a testamentary trust created under a will or an inheritance trust created under a revocable living trust, the trustee makes all decisions about distributions. This can be an effective means of controlling the flow of money.

A spendthrift trust, according to the article “Possible to spendthrift-proof a trust” from Record Courier, is created for the benefit and protection of a financially irresponsible person.

For a spendthrift trust, it may be better not to choose a family member or trusted friend to serve as the trustee. Such person might not live long enough or have the capacity to serve as trustee for as long as required, especially if the heir is a young adult. Conflicts among family members are common, when money is involved. An independent and well-established trust company or bank may be a better choice as a trustee. Large estates often go this route, since their services can be expensive. However, some retail banks do have a private wealth division. All options need to be explored.

Another benefit to a spendthrift trust—funds are protected against current or future creditors of the beneficiary. Let’s say a parent wants to leave money to a child, but knows the child has credit card debt already. Unless they are co-signers, the parent and their estate do not have a duty to pay an adult child’s debts. The spendthrift trust will not be accessible to the credit card company.

It is difficult to set up a spendthrift trust to protect one’s own money from creditors. This is something that must be approached only with an experienced estate planning attorney. This is because the rules are complex and there are significant limitations. If you wanted to create a spendthrift trust for yourself, you would have to completely give over control of assets to the trustee. There is no way to predict whether a court will consider the person to have relinquished enough control to make the trust valid.

This type of spendthrift trust may not be created with an intent to defraud, delay or hinder creditors. Doing so may make the trust invalid and any possible protection will be lost.

A spendthrift provision in a will is a clause used to protect a beneficiary from a creditor attaching prior debts against the beneficiary’s future inheritance. This means that the creditor may not force an heir or the estate’s executor to pay the beneficiary’s inheritance to the creditor, instead of the beneficiary. It also prevents the beneficiary from procuring a debt based on a future inheritance.

It is important to be aware that a spendthrift provision in a will or a spendthrift trust has limitations. The assets are only protected when they are in the trust or in the estate. Once a distribution is received, creditors can seek payment from the assets owned by the beneficiary.

Another qualifying factor: the spendthrift provision in the will must prevent both the voluntary and involuntary transfer of a beneficiary’s interest. The beneficiary may not transfer their interest to someone else.

The spendthrift trust and clause are mainly intended to protect a beneficiary’s interests from present and future creditors. They are not valid if their intent is to defraud others and may not be created to avoid paying any IRS debts.

Reference: Record Courier (July 10, 2021) “Possible to spendthrift-proof a trust”

Trusts can Work for ‘Regular’ People

A trust fund is an estate planning tool that can be used by anyone who wishes to pass their property to individuals, family members or nonprofits. They are used by wealthy people because they solve a number of wealth transfer problems and are equally applicable to people who aren’t mega-rich, explains this recent article from Forbes titled “Trust Funds: They’re Not Just For The Wealthy.”

A trust is a legal entity in the same way that a corporation is a legal entity. A trust is used in estate planning to own assets, as instructed by the terms of the trust. Terms commonly used in discussing trusts include:

  • Grantor—the person who creates the trust and places assets into the trust.
  • Beneficiary—the person or organization who will receive the assets, as directed by the trust documents.
  • Trustee—the person who ensures that the assets in the trust are properly managed and distributed to beneficiaries.

Trusts may contain a variety of property, from real estate to personal property, stocks, bonds and even entire businesses.

Certain assets should not be placed in a trust, and an estate planning attorney will know how and why to make these decisions. Retirement accounts and other accounts with named beneficiaries don’t need to be placed inside a trust, since the asset will go to the named beneficiaries upon death. They do not pass through probate, which is the process of the court validating the will and how assets are passed as directed by the will. However, there may be reasons to designate such accounts to pass to the trust and your attorney will advise you accordingly.

Assets are transferred into trusts in two main ways: the grantor transfers assets into the trust while living, often by retitling the asset, or by using their estate plan to stipulate that a trust will be created and retain certain assets upon their death.

Trusts are used extensively because they work. Some benefits of using a trust as part of an estate plan include:

Avoiding probate. Assets placed in a trust pass to beneficiaries outside of the probate process.

Protecting beneficiaries from themselves. Young adults may be legally able to inherit but that doesn’t mean they are capable of handling large amounts of money or property. Trusts can be structured to pass along assets at certain ages or when they reach particular milestones in life.

Protecting assets. Trusts can be created to protect inheritances for beneficiaries from creditors and divorces. A trust can be created to ensure a former spouse has no legal claim to the assets in the trust.

Tax liabilities. Transferring assets into an irrevocable trust means they are owned and controlled by the trust. For example, with a non-grantor irrevocable trust, the former owner of the assets does not pay taxes on assets in the trust during his or her life, and they are not part of the taxable estate upon death.

Caring for a Special Needs beneficiary. Disabled individuals who receive government benefits may lose those benefits, if they inherit directly. If you want to provide income to someone with special needs when you have passed, a Special Needs Trust (sometimes known as a Supplemental Needs trust) can be created. An experienced estate planning attorney will know how to do this properly.

Reference: Forbes (March 15, 2021) “Trust Funds: They’re Not Just For The Wealthy”

Join Our eNewsletter

Recent Posts
Categories