For your estate plan, you have decided to create a trust, rather than a will. Why? You have your reasons, but a big reason is your concern about the spending habits and lifestyles of your beneficiaries.
As long as you have known them, they have not handled money in a prudent manner. Financial responsibility has not been their strength. They have splurged too many times, buying expensive things too quickly without thinking through the purchase. Some heirs also may have substance abuse problems. All of this makes you nervous, especially since you have a sizable estate.
Within the trust, though, you have put in place a secret weapon: the spendthrift clause or provision. Now, you feel more at ease. A spendthrift clause may be considered a “safety device” within a trust. It protects the beneficiary’s inheritance from creditor claims.
Protects principal from creditors
For example, say that you left your son $2 million and the trust account generates $100,000 annually paid to him. If he makes an expensive purchase that he is no longer able to pay, creditors can only collect from him on the $100,000 trust distribution.
The spendthrift clause should include clear directions for the trustee — the person who oversees the trust and determines what payments are required. Another directive is that the clause prevents the trustee from sending assets to anyone except the beneficiaries.
The spendthrift clause may include instructions to stop distributions if a beneficiary has, for example, a substance abuse or gambling problem. So not only does a spendthrift clause protect the trust’s principal from creditors as long as the assets stay in the trust, it essentially protects the beneficiaries from themselves.
With a spendthrift clause in place, the trust’s principal will remain intact, while protected from your beneficiary’s creditors. Your heirs may grumble during the short term, but they will likely be much happier years down the road knowing that the trust is still there.