Protecting Inheritance with Spendthrift Trusts

Posted by Debby EhrlichJan 06, 20220 Comments

We love our children unconditionally, right? Right. That said, sometimes we shouldn't provide for them unconditionally. Maybe your child has consistently demonstrated risky spending behaviors, or perhaps they have a propensity for generating debt. We all have our talents, after all. Whatever the reason, it can be nerve-wracking to hand over your life's work wondering: What if my kid blows their inheritance?

If these concerns sound familiar, you're not alone. Fortunately, there's an estate planning tool that's designed to protect assets from heirs who might not be so great with money. This tool is called a Spendthrift Trust, and it's an excellent vehicle for passing wealth onto heirs with certain limitations attached.

What are the Pros of a Spendthrift Trust?

A Spendthrift Trust is an irrevocable trust that provides asset income to your heirs while protecting the actual trust assets. For example, if you place investment real estate into a Spendthrift Trust, your children can be paid rental income derived from the property, but they will not be able to sell the property or use it as collateral for a loan. Spendthrift Trust assets are also shielded from lawsuits, debt collectors, and even ex-spouses.

What are the Cons of a Spendthrift Trust?

A Spendthrift Trust may be precisely what you need, but it's important to consider your options carefully before opting to move your assets into one. The biggest consideration involving Spendthrift Trusts is that they are irrevocable. Once you move assets into a Spendthrift Trust, the terms are final. Altering an irrevocable trust is like putting toothpaste back in the tube (and paying a lawyer to do it).

You may also face disappointment from your children. It can be difficult for your kids to understand why you need to protect their inheritance from themselves, but these tough conversations are worth having. Clear communication can help resolve misguided feelings.

Discuss Your Options with an Experienced San Diego Estate Planning Lawyer

Trusts are commonly used in estate planning, but you must understand what kind of trust you need and how best to accomplish the trust creation. In California, a Spendthrift Trust must contain specific language. Failure to include the necessary provisions will leave your heirs vulnerable to creditors, lawsuits, and their own poor habits.

Call a knowledgeable California estate planning attorney at DME Associates LLC today at (805) 312-8059. We can help you explore your options and make the best choice for you and your family.