What is a spendthrift trust?

On Behalf of | May 12, 2020 | Trusts |

A spendthrift is a person who spends their money too quickly and often wastes it. From the outside, it appears that they make poor financial decisions that impact their quality of life.

While it’s one thing to watch a person do that with money they earned, it’s another to consider them doing it with your money. This is why many people with heirs who are spendthrifts decide to use trusts to protect that inheritance.

There are a few ways to do this, starting with a trust that pays out in increments over time. This may not prevent frivolous spending, but it can at least slow that spending down. Maybe you’re leaving someone $100,000. You think they’ll spend it all in six months if you just leave it to them. A trust that pays out $10,000 per year can at least stretch that money out for 10 years, increasing the odds that they’ll have it when they need it for something important.

Another way to protect your heir from their own habits is by dictating what they can use the money for. Worried that they’ll buy a sports car instead of paying to get an education? Put the money into an educational trust that can only be used for tuition and related costs. Now you can leave them as much as you want without worrying that they’ll waste it.

Of course, even that raises other questions. You have to consider what to do if they don’t go to college at all, for instance. Do they ever get the money? The solution that you settle on is up to you, but this shows you just how important it is to understand what legal options you have.

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