Trusts for Creative Spenders

02-01-2016Children & Students

Trusts can be quite useful for protecting children. However, for some children, the trust serves an additional function: It protects the principal from being rapidly spent by a child. These trusts have a specific name—they are called "spendthrift" trusts.

A spendthrift trust allows a parent to protect a certain amount of inheritance. If you have a circumstance like this, it may be appropriate to transfer inheritance outright to some of your children and the same amount of property into a spendthrift trust for the "creative spender" child.

A spendthrift trust will need to be managed by a trustee who can make good decisions. For a larger trust, this could be a bank or trust company. In many circumstances a private trustee is selected, such as one of the family financial advisors or even one of the other children.

The trustee will have the usual power to invest and manage the trust assets.

The spendthrift trust often includes different provisions that apply to the income:

  1. Income may be paid to the child.
  2. Income may be paid to persons or organizations providing benefits to the child.
  3. The child may not demand the payment of the income.
  4. The child may not pledge or borrow against the trust income or principal.
  5. The trustee usually has complete discretion over distributions.
  6. Trust principal may be used by the trustee for the education, healthcare needs or support of the child.
  7. The trustee will have discretion to distribute principal over the duration of the trust.