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A spendthrift trust could resolve estate planning dilemmas

Spendthrift trusts have gotten a bit of a bad rap due to their name, which implies that heirs are profligate spenders unable to keep two dimes to rub against one another.

While it is certainly true that a spendthrift trust can be used to put the brakes on heirs' reckless financial habits, that is certainly not the only use for these types of trusts.

Protecting a legacy with a spendthrift trust

In fact, a spendthrift trust can be used to protect heirs who are otherwise responsible but whose chosen professions leave them them open to lawsuits, e.g., doctors who may be defendants in malpractice litigation.

Sometimes, too, it's not that the beneficiaries are wanton spenders but instead, they are financially naive and unused to managing large sums of money. They may be preyed upon by unscrupulous individuals under the guise of "helping" them learn to manage their money.

Will a spendthrift trust benefit your heirs?

Suppose you have an adult son or daughter who has struggled with their sobriety and battled addiction to alcohol or drugs. They may have years of sobriety under their belts, yet you fear that a sudden influx of cash on the heels of your death could spark a relapse.

By structuring a spendthrift trust to only release funds at certain times preset by you, you can help your loved one sidestep temptations to fall off the wagon when they are at their most vulnerable points.

Here's how it works

As trust grantor, you determine the amount of the principal in the trust. The principal is then managed by a trustee who is also appointed by you. The beneficiary has no control over the principal and is unable to deplete it, pledge it or have it plundered by spouses or plaintiffs in lawsuits.

Grantors also set the terms for how often funds will be disbursed — and the amounts. If you choose, you can require that beneficiaries must be gainfully employed to receive disbursements. But that could potentially backfire should they become ill or disabled and no longer be able to hold down steady employment.

This is where your estate planning attorney can be of great help. They can help you include contingencies that allow for special circumstances to ensure that your beneficiaries' needs will continue to be met by the trust.

Spendthrift trusts protect assets from creditors

As we saw recently in the last recession, adverse financial circumstances can affect almost all Tucson residents. Since no one can see into the future, it is possible that your beneficiary may one day be forced to file for bankruptcy. Without a spendthrift trust in place, their assets could be wiped out to pay off their creditors. Under most circumstances, a spendthrift trust will protect the resources in the trust as they are neither owned nor controlled by your beneficiary.

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