The biggest fear of any person engaged in estate planning is leaving their hard-earned money to an irresponsible heir. We all love our children, but sometimes those very children we’re leaving our fortune to aren’t capable of handling it. It’s common in families to have one kid who’s good at managing finances and values money, and another who can’t stick to a stable career and spends more than they earn.

Despite this, you have their best interests at heart and want to secure their financial future. But how do you make sure they don’t spend their inheritance on shopping or clearing debts the minute they get it? Don’t worry, a trust is just what you need.

Dealing With Spendthrift Beneficiaries

Spendthrift beneficiaries, as they are called in estate planning, are heirs or beneficiaries prone to overspending, accumulating debt, or making illogical and impulsive money decisions. They can end up spending insane amounts of money on shopping sprees, disastrous investment decisions, or investing in ill-researched business ideas.

While some of these people are simply bad at managing money, others could also have mental health issues which render them incapable of making thoughtful money choices. So, it is up to you to plan your estate with certain conditions and guardrails in place to discourage or disallow spendthrifts from getting full control of your estate and squandering it. For this, it is important to never name a spendthrift heir as the direct or sole beneficiary of your life insurance policies, real estate, or retirement accounts.

Instead, you can create a trust with a reliable trustee of your choice and strict rules to ensure the spendthrift heir cannot bypass any of the conditions you set.

How to Protect Your Estate with the Trust Option

A trust is a legal arrangement that enables you (the settlor) to give your assets to an institution (the trust) headed by a trusted person (the trustee) to manage for your heirs (the beneficiaries). As the Settlor, you get to decide when and how these assets are to be given to the beneficiaries and how much power the Trustee has.

While creating a trust for a spendthrift heir is similar to a normal trust, there are some things you must be cautious about:

• Choosing a Trustworthy Trustee: Like with any trust, choosing a Trustee who is honest, reliable, has sound knowledge of asset management, and has your best intentions at heart is the first step. With a spendthrift trust, this becomes all the more important as the trustee must be firm enough to resist any coaxing or manipulation by the spendthrift beneficiary. If the Trustee is a family member or friend, they may be more likely to give in. Hence, getting a neutral, professional estate planning company to handle your estate is a better option.
• Draft the Trust Document: When you have a spendthrift heir to care for, the documentation has to be watertight. Make sure none of the terms and conditions have loopholes that can be challenged or misused. Set clear, specific instructions on how the assets are to be managed and distributed.

Most importantly, don’t forget to add a specific clause stating that the spendthrift beneficiary has no right to sell or pledge their interest in the trust as collateral for a loan, further protecting the trust assets from creditors and the beneficiary themselves. Consult an estate planning advisor regarding how to word the clause and draft the trust document.

Types of Trust Structures Worth Considering

Here are some of the types of Trusts you can consider to protect your estate from spendthrift beneficiaries.

• Irrevocable Trust: A spendthrift risk is best protected by an irrevocable trust, which, once the guidelines and conditions are fixed, cannot be changed even by the Settlor. With such a Trust, you can dictate the terms and empower the Trustee to make financial decisions in the beneficiary’s best interests, even if it is upsetting to them. You can specify how you would like your estate to be administered, such as covering the necessities of the beneficiaries, including housing, medical insurance, food and education, as well as which expenses should not be covered by the Trust. You can also use the Milestone Distributions approach, in which the beneficiary must fulfil a specified milestone (turning 25, marriage, graduation) for their monthly payouts to be released. This prevents them from spending all their money at once while also ensuring long-term financial support. Another condition you can include is that your beneficiary complete financial management classes or consult a financial advisor to access their inheritance.
• Specialty Trust: In families with specially abled heirs, a Specialty Trust helps protect the beneficiary’s inheritance and government benefits from creditors or gold-diggers. If your heir is struggling with addictions or mental health issues, you can also put in a clause that makes regular checkups, drug testing, and reporting of results mandatory for the beneficiary to receive payments from the Trust.
• Discretionary Trusts: In this type of Trust, the Trustee has full control and discretion over how funds are distributed to the beneficiaries. If deemed necessary, the Trustee could refuse to pay the spendthrift beneficiary, preferring to pay their necessary expenses directly.

The Annuity Option

While an irrevocable trust is an effective option, it is not the only one. Small estates that cannot afford a trust structure can also opt for an annuity, an insurance product that provides a fixed sum of money at regular intervals. Annuities are very different from Trusts and depend on multiple factors such as life expectancy and health conditions. Hence, it is prudent to seek advice from an estate planning and annuity specialist before investing your life savings in it.

The best way to protect and provide for a spendthrift beneficiary is by keeping the reins of control and access to your estate in more reliable hands. Thus, it all boils down to choosing the best possible person as the Trustee. Spendthrifts often succeed in manipulating friends and family into giving in. But if an unrelated, neutral, and professional company is given control, the chances of succeeding in protecting your estate — and their future — are much higher.

Contact Ford Keast LLP in London to Help You with Estate Planning

Talk to an estate planning advisor to discuss your concerns around your beneficiaries, your estate, and finances to come up with a tax-efficient structure that protects your estate from your spendthrift beneficiaries while providing for them. At Ford Keast LLP, our tax and estate advisors provide services including estate planning and wealth management. To learn more about how Ford Keast LLP can provide you with the best taxation and estate planning services, contact us online or by telephone at 519-679-9330.