A spendthrift trust is a special kind of trust for estate planners who are worried about gifting a large sum of money to their heirs all at once. Perhaps you're concerned that a teenage heir is too immature to handle a big inheritance. Or, maybe you have a someone you want to give money to, but he or she has a history of bad financial decisions. A spendthrift trust can give you peace of mind in these situations.
When you create a spendthrift trust, the trust account will contain assets that a trustee oversees. The trustee will control the assets according to the directions that you have laid out in the trust paperwork. Those instructions might include dolling the money out slowly over a period of time -- perhaps it simply provides the recipient a reliable and dependable allowance for living expenses until he or she reaches a specific age.
Let's say you leave $ 1 million to your grandson and you put it in a spendthrift trust, which is generating about $50,000 per year in income. This money can be delivered to your grandson each year in payments. Also, the trust basis would be protected from access by your grandson, and he could not use it as collateral for a loan. Even if your grandson took out a large loan and defaulted, the trust would be protected from potential creditors and also from your grandson.
As you can see, spendthrift trusts can be very useful in protecting the welfare of an heir who might not be fiscally responsible or mature enough to manage the sudden influx of a large inheritance. If you're considering a spendthrift trust for one of your heirs, an Illinois estate planning lawyer can help.
Source: The Balance, "How a Spendthrift Trust Can Protect Your Heirs from Themselves," Joshua Kennon, accessed July 27, 2017