Many families across California can identify with having children, grandchildren or other beneficiaries that failed to inherit the same diligent savings habits as their parents or grandparents. As you plan your estate, you may worry about how these loved ones may cope with a sudden increase in wealth.
Fortunately, there are options for you to proactively plan for such situations. Spendthrift trusts, or trusts with a spendthrift clause or provision, allow you to do just this. While your loved one will still receive the assets intended for them, they will receive such assets in periodic distributions set according to your customized terms.
Protecting financially irresponsible beneficiaries
A spendthrift provision allows you to structure your trust so that a trustee manages and releases your beneficiary’s interests in increments according to the trust agreement, rather than in a lump sum. For example, you could plan for the trustee to distribute payments in $100,000 increments to the beneficiary each year, rather than $1 million all at once.
Benefits of these trusts include:
- Creating or encouraging financially responsible habits by transferring wealth over time
- Protecting the full amount of the inheritance from creditors or judgments against the beneficiary
- Preventing the beneficiary from selling or pledging the full amount of the inheritance or trust assets as collateral
As with other trusts, a spendthrift trust can also avoid going through probate court, which is a priority for many.
What are the disadvantages?
One of the main benefits of spendthrift trusts is the ability to shield the full extent of the wealth from creditors or in the event of a divorce, bankruptcy or more. However, the California Probate Code details some exceptions to this.
In some situations, a court may order the trustee to release future payments to satisfy a judgment against the beneficiary. Fortunately, the law also states that such released payments may not exceed 25 percent of future transfers.
Preserving your hard-earned wealth
You have worked hard to create and preserve your estate, with the intention of passing on your assets to your loved ones when the time comes. Your attorney can assist in determining whether a spendthrift trust may be beneficial given your specific wishes and circumstances.
