How to Keep Heirs From Being Spendthrifts

August 30, 2020

This article was originally published to subscribers of The Wall Street Journal, found HERE.

Over the course of my career, I’ve seen spendthrift beneficiaries attempt to burn through trusts—seeking money to fund credit-card debt, half-baked business ideas, designer shopping sprees and even plastic surgery.

Spendthrift beneficiaries can be manipulative, self-centered and narcissistic in dealing with the trustees who manage the money and who are responsible for distributing it in accordance with the wishes of the person who set up the trust.

They can even resort to bullying to get what they want. That’s why it’s important to put strategic “guardrails” in place to help protect your assets and to make sure your hard-earned money will last long after it’s gifted to future generations.

Here are a few timely tips to put restrictions on spendthrift beneficiaries:

Set up an irrevocable trust with strong, clear language about distribution guidelines. Create an irrevocable trust that cannot be amended by your beneficiaries and includes a comprehensive list of distribution guidelines, detailing what is and is not permitted under the terms of the trust. Remember that the more relaxed the standards of the trust agreement are, the easier it will be for spendthrift beneficiaries to get to the money, which ultimately may not be in their best interest. The strongest level of protection you can provide to whomever administers your trust is “sole, absolute and unreviewable discretion.”

Determine whether a specialty trust might be appropriate. In certain cases, a special-needs trust might be strategic, so creditors can’t get to the trust money and government benefits will not be affected for a beneficiary who is on disability. If you have a child with addiction issues, you can also elect to require regular drug testing and reporting of results in order for the beneficiary to qualify for payments.

Emphasize the importance of independence. The terms of your trust should explicitly state that it is your desire for your beneficiaries to live as independently as possible. Make it clear that whoever administers your trust has total discretion to make financial decisions and that he or she may take into account any additional financial resources your beneficiaries may have. It’s fine to cover basic necessities like housing, medical insurance and food, but it’s important to try to keep the trust funded for the lifetime of the beneficiary and, where desired, for future generations including grandchildren and great-grandchildren.

Remember that it’s OK to treat children differently. If you have one child who is a successful businessperson and another child who moves from job to job or is unemployed, you will want to make different provisions for each beneficiary. Evaluate the unique needs of each beneficiary and keep in mind that you don’t have to make identical provisions for each child.

It’s critical to implement thoughtful restrictions for spendthrift beneficiaries in order to put the brakes on potentially irresponsible financial behavior. Fortunately, there are provisions that can be put in place in advance to protect out-of-control spenders from themselves and to make it easy for whomever administers your trust to say “no.”

Are you concerned about potential spendthrift beneficiary family members? Reach out to us to discuss further.