Not everyone is capable of competently handling a large inheritance. Some people will spend assets unwisely and others will lose them to creditors. There is a simple way to protect your heirs from these self-inflicted harms.
Everyone knows someone who is terrible at handling money. These are the people who can be counted on to quickly spend any money they have on unnecessary and often frivolous things. Sometimes they are the people who always seem to have debts due to bad investments or credit decisions.
If you have a family member with these problems, then you would be wise to consider what will happen if you leave them an inheritance. It is unlikely that a person with a history of bad financial decisions will suddenly make better decisions after receiving an inheritance. However, that does not mean that you should not leave an inheritance for these family members.
This topic was discussed in a recent Reading Eagle article entitled "Office Space: Spendthrift trusts: how to (properly) protect a beneficiary from herself."
A spendthrift trust is specially designed to handle just these situations. It protects the trust principal from being seized by a beneficiary's creditors. It also prohibits the beneficiary from transferring or assigning interests in the trust to another person. Trust assets can only be spent, transferred or seized by creditors after a third-party trustee distributes assets to the beneficiary.
The process of creating a spendthrift trust varies from state to state. It is important to have the assistance of a qualified estate planning attorney when creating a spendthrift trust to make certain the trust satisfies applicable state laws.