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When to use a spendthrift trust in Indiana

On Behalf of | Sep 14, 2022 | Estate Planning

Individuals who suddenly come into wealth without preparation are often likely to make financial mistakes that can leave them broke or in debt. If you have an heir in Indiana that you think or observed to have poor spending habits, you can protect them with a spendthrift trust.

Understanding a spendthrift trust

A spendthrift trust is an irrevocable trust specifically designed to protect beneficiaries from their poor spending habits. It can be set up to allow the beneficiary limited access to the funds or in a way that the beneficiary cannot access the funds at all. Either way, the trustee retains complete control of the assets in the trust.

Deciding if you need it

Suppose you have a beneficiary with a gambling addiction that they can’t seem to kick, a drug problem or is extravagant. In that case, you can put conditions on a spendthrift trust that only allows them to access the funds if they’re in treatment or making progress on their financial literacy.

Other situations where a spendthrift trust may be beneficial include:

  • If you want to provide for a special needs beneficiary without disqualifying them from government benefits
  • If the beneficiary is going through or recently went through a divorce
  • If the beneficiary is unemployed or underemployed
  • If the beneficiary is not yet mature enough to handle a large sum of money responsibly

Things you can’t do with a spendthrift trust

A spendthrift trust is a good estate planning tool that can protect assets from creditors. Given its irrevocable status, a creditor can’t come after the assets in the trust. However, they can reach the beneficiary’s distributions from the trust.

Moreover, debts like child support and alimony back payment or restitution payments to victims committed by the beneficiary must be paid, and that money can be ordered from the trust. There are also lawsuits that may force the court to lift the spendthrift clause and let the trustee dip into trust funds to cover those costs.

Ultimately, deciding whether or not to set up a spendthrift trust will depend on your specific circumstances and relationship with your heir. If you have concerns about their ability to handle money responsibly, it may be worth considering. However, if you think they can manage a large sum of money prudently, you may not need one.