Attorney
The point of estate planning is to protect your assets and pass them down to your beneficiaries. But what if you need to protect assets from your heirs themselves? Beneficiaries with irresponsible spending habits can quickly burn through any direct inheritance left to them, which can cause a great deal of family drama and turmoil. Fortunately, there are several estate planning strategies you can use to protect beneficiaries from their own worst impulses.
Trusts Are a Solution to Irresponsible Heirs
The most straightforward method of protecting heirs from their bad spending habits is to establish a trust. Trusts are a financial arrangement in which a person (called the trustor) grants some third party (the trustee) control of assets to manage them for a third party (the beneficiary). Although the trustee manages and distributes the assets, they must do so in the best interest of the beneficiary and according to the instructions of the trust. Essentially, a trust can hold certain assets and put conditions on how the beneficiary can access them, preventing them from squandering an inheritance.
Spendthrift Trusts in Kentucky
According to KRS 386B.5-020, a spendthrift trust is a trust that restrains the voluntary and involuntary alienation of the interest of the beneficiary. In plain language, in a spendthrift trust, the trustee limits the assets the beneficiary receives and how they can use them, in order to protect the beneficiary’s financial interests. One major advantage of a spendthrift trust compared to other trusts is that the trustee owns the assets, not the beneficiaries. This means that creditors cannot come for the remainder of assets if the beneficiary accrues debt.
Let’s consider an example of how a spendthrift trust might work. Say you want to leave $500,000 to your son John, but he has a gambling issue. You and your attorney can structure a trust to give John a monthly income while the trustee oversees how he uses the money. You can further authorize the trustee to disburse more money based on their discretion, such as for medical costs. You could also condition the use of the funds on certain events or triggers, like financial milestones or reaching a certain age.
The Role of the Trustee
The trustee is responsible for overseeing and managing assets for the beneficiaries, so it’s important to choose someone you trust and who can be impartial. As a general rule, you should avoid family members as the familial relationship could cause conflict. For instance, if you established your other son, Adam, as the trustee for John, their relationship could negatively impact Adam’s ability to act impartially as a trustee.
Annuities
Another option to protect an heir from squandering an inheritance is an annuity. An annuity takes a lump sum purchase and distributes it as regular income over a set period. For example, you can put your son John’s $500,000 inheritance into an annuity and have it distribute income on a monthly or yearly basis.
The main difference of an annuity is that the trustor can dictate exactly how the annuity is paid out. Annuities also have more legal safeguards than spendthrift trusts, so it is even harder for creditors to come after assets for the beneficiary’s debts. Lastly, annuities have a lower annual maintenance cost than a spendthrift trust that a trustee has to manage.
Estate Planning Attorney in Shelby County
Every person’s situation is different, and there is no single “best” method to preserve assets for beneficiaries with spending problems. Your best option is to work with an estate and trust planning attorney who can provide guidance. Contact us online or reach out by phone to schedule a consultation with an estate planning attorney from Berkley Oliver PLLC.