What do you do if you want to create a trust fund for your college kid, but you are afraid they would squander it immediately once they got their hands on it? You create a spendthrift trust. Read on to know what it means and how it can help your kid.
What It Is
When you create a spendthrift trust, you get to control the beneficiary's access to its funds or properties. This allows you to determine how the beneficiary can use the money. Therefore, you can set up a trust fund for your kid, and they won't be able to squander the money because your chosen trustee will see to it that the money is used as per your wishes.
In Practical Terms
The beauty of a spendthrift trust is that its language is very specific. This allows you to state exactly how your beneficiary will use the money. For example, if you want to use the money to support your child through college, you may specify that the trust fund is strictly for college-related expenses. This means, for example, that the child cannot use the funds to buy a sports car and drop out of college once they are unable to support themselves.
What about your child's creditors who may come after the trust? This has been taken care of in the trust fund too. With a few exceptions, the language of the spendthrift trust is usually crafted to keep out creditors too. In fact, even a crafty kid cannot borrow money or buy things on credit and hope that the creditors will use the trust fund to get their money back. The beneficiary can only use the trust fund to settle special "debts," such as child support, government claims, and alimony. However, this depends on your state's laws, which you should consult before creating the trust.
When Does It End?
If you are worried that this arrangement may only be suitable for a time, don't be. It's understandable that you expect your child to "grow up" and become financially disciplined after some time. For that reasons, spendthrift trusts can be set up with an expiry date, so to speak. For example, you can leave instructions for the trustee to hand over the spendthrift trust to the beneficiary once they reach a certain age, say, 27.
Does this look like something you should do as part of your estate planning? Consult an estate planning attorney to help you craft a spendthrift trust and ensure it is legally binding.
Talk to a professional like Jolein A. Harro, P.C. to learn more.
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