How to Keep Your Heirs from Blowing Their Inheritance

Spendthrift trusts may sound like you're trying to keep your kids from frittering away your legacy, but they are not just for those with spending problems. They're useful in cases of divorce, substance abuse or where beneficiaries are young or financially inexperienced.

We all want what is best for our children. We work hard to provide for them while we are here on Earth, and the estate planning process ensures we continue to provide for them once we are gone. But, of course, it’s not always as simple as that.

If we are fortunate, we’ll be able to leave an inheritance, sizable or not, to our children. And even if our children are adults — barely over the age of 18, well into their 20s, or beyond – that doesn’t necessarily mean they should have easy access to any or all the money that is left for them.

Adult children may not be ready to handle a significant inheritance due to a variety of reasons. They could be financially immature and unable to budget their money. They could be involved in an unhealthy relationship with little say or control over their financial matters. They could have addiction issues and be unable to cope. Or they could simply be too young. Providing a large sum of money to an heir in any of these scenarios could have disastrous results.

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The truth is, many of us just aren’t equipped to deal with receiving a large sum of money all at once. Think of all the stories you’ve seen and read about lottery winners standing in front of the camera with their oversized checks, talking about how they are going to quit their jobs, travel the world and buy homes for their family members. They’ll save some of the money, too, they say.

Their intentions may be good, but sadly, many of them end up going broke and filing for bankruptcy.

While your inheritance may not be equal to the Mega Millions, you still want to protect it so your beneficiaries don’t have the chance to blow right through it.

Enter the spendthrift trust

A spendthrift trust protects your heirs from themselves by providing a trustee with the authority to control how the beneficiary can use the funds. A trust becomes a spendthrift trust when the creator includes specific language indicating the trust qualifies as such, and by including limitations to the beneficiary's control of the funds.

A spendthrift trust also protects assets from creditors because the assets are not owned directly by the beneficiary; a spendthrift trust is generally protected from divorces, lawsuits and bankruptcies, and can keep money away from manipulative family members and friends, too.

Of course, once the money is paid out from the trust, that money is available to creditors just like any other assets owned by the beneficiary in his or her own name.

The role of the trustee

The trustee plays a critical role because they are in control of how and when the beneficiary receives money.

The grantor of the trust (that's you) considers how much power to give the trustee. He or she can outline that the trustee is to make set payments to the beneficiary each month, regardless of circumstance, or that the trustee has the discretion to decide how much money the beneficiary will receive when and under what terms, if any.

For example, let’s say a grantor has given the trustee full control over the trust if the money is used for Jonny’s college tuition. The trustee can write a check for tuition payments each semester with no conditions whatsoever, or the trustee can put certain conditions on Jonny’s academic performance and pay his tuition if he maintains a certain GPA or graduates within a specific time frame.

For a different example, if the beneficiary has or had a substance abuse problem, the trustee can make access to the money contingent on a clean drug test. The trustee in this case will have to consider several factors, such as who will administer the drug test and how often the beneficiary must take it.

Although you can appoint anyone over the age of 18 to be the trustee of your spendthrift trust, you’ll want to carefully consider the person you choose to do the job. You can hire a professional firm, bank, or investment company to do it for a fee, or you could appoint a family member or friend. (To learn more, see How to Choose the Right Trustee for Your Estate.)

If you appoint a family member as the trustee, keep in mind any family dynamics that might come into play between the trustee and beneficiary. You don’t want things to turn ugly or be uncomfortable. As I say to my clients, Thanksgiving dinner becomes quite uncomfortable when Uncle Joe stops being just “Uncle Joe” and begins to be “Uncle Joe who has my money.”

How to create a spendthrift trust

An estate planning attorney will help you determine whether a spendthrift trust makes sense for you and your heirs. He or she will ask detailed questions to understand what you want to accomplish, who might be good candidates to administer the trust and when and how you want the trust to end.

You will discuss other factors as well to ensure all bases are covered in the event of different scenarios playing out.

In the end, a spendthrift trust might be what you need to ensure your assets are protected and your family members are cared for.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Philip J. Ruce, J.D., LL.M.
Estate Planning Attorney, Stone Arch Law Office

Philip J. Ruce is a Minnesota estate planning attorney at Stone Arch Law Office, PLLC. Philip places a premium on a high level of client service and loyalty. Philip's trust and fiduciary research has been published by universities around the country. Philip is a graduate of the University of Minnesota (B.A.), William Mitchell College of Law (J.D.), and Thomas Jefferson School of Law (LL.M.). Philip is married with two children.