A spendthrift trust can be a very powerful estate planning tool if you want to leave assets to someone who isn’t good with money. I have always said that everyone has their strengths, i.e. things that they are good at. Some of us are very artistic. Some of us are great at math. Some of us are athletic. Etc., etc. On the flip side, we all have our weaknesses too. And one weakness that can potentially come into play when thinking about estate planning has to do with how well, or not so well, a loved one can handle money. As many wonderful qualities that someone you really care about may have, he or she may be downright awful at handling their financial affairs.

Question: What do you do if you want to leave assets to someone who isn’t good with money?

Answer: Creating a spendthrift trust might be the way to go.

A spendthrift trust is a trust that benefits the person you want to give assets to, but that person is not allowed to make decisions on when and how to transfer assets out of the trust. Basically, they have no direct control over the assets. And because they have no control of those assets, his or her creditors cannot go after the assets inside the trust. And FWIW, a spendthrift trust can easily be added to your will in the form of at testamentary trust.

So for example, if the beneficiary who you love dearly buys a car on credit and they end up getting behind the payments on it, then the car loan company will not be able to go after assets inside the trust to make up for those late payments. The same thing goes for a bad business deal or whatever else this person might get entangled with.

To create a spendthrift trust you have to include language that shows you had the intent to create such a trust. Merely using the term ‘spendthrift’ in the trust creation language is sufficient for this. Likewise, unlike some other trusts where you can name the beneficiary as the trustee as well, you cannot do this with a spendthrift trust. So you must name a different person as the trustee. If you think about it, this makes complete sense. Because if the beneficiary were also the trustee, then this might encourage sleazy people to create spendthrift trusts for themselves with the purpose of intentionally ripping off creditors.

But this lack of control of the trust assets is more than worth it if you believe the beneficiary runs a high risk of getting into financial troubles later down the road. In many ways creating a spendthrift trust may be a loving way to help save them from themselves.