What do you do when you want to leave part or all of your estate to someone who may not be able to properly handle their inheritance due to lack of age or maturity? Many people have loved ones such as children or grandchildren who they want to inherit their estate but feel uneasy about their spending habits. Such a person could easily spend their way through several hundred thousand dollars in a matter of years or even months. This type of person we call a spendthrift. The money could be there to be used for their education or to help purchase a home for them. Most simple wills do not properly work in this situation because under a simple will the spendthrift would receive full control of their inheritance as young as 18 or 21 (depending upon the state law involved and the nature of the assets inherited).

Imagine what an 18 year old would do with full control over $200,000 in cash that he could spend any way he desired. When I was 18 I was not what you would call mature or financially sophisticated. The first thing that I would have done would be to buy a car. Not just any car, mind you, it had to be a corvette. A shiny new red convertible corvette with every option that the dealer could provide and every option that I could get customized on that car. Today that car would cost about $70,000. But that was okay; I still had $130,000 dollars left to spend and that money would have lasted me at least a year, perhaps as long as 13 or 14 months before it was all spent. In addition to spending that money on things that were foolish, I might have spent that money on things that weren't "good" for me. Things that could have destroyed my life. In this example I would have been better off not getting a single penny of that money.

Most living trusts have a provision known as the age of distribution provision. Under the age of distribution provision the heir does not get all of his money at once. I recommend a starting age of distribution of age 25. The reason that I recommend a starting age of 25 is that what we find is that the first signs of intelligent life begin to appear around age 25. Now I said the first signs of intelligent life; I did not say anything about being intelligent or mature yet. If you dropped $200,000 in the lap of a 25 year old they may still go buy that car or do foolish or self destructive things with that money. Instead what is normally done is to start the age of distribution at 25 and then "sprinkle" it over a longer period. For example, starting at age 25 and sprinkled 10% a year over 10 years or 5% a year over 20 years. That way the money is not available to that person all at once, hopefully allowing the person to mature as the money is received. Typically we don't go beyond the age of 45 because for most people, if they don't get a "clue" by age 45 the odds of that happening are about the level of winning the lottery. The money is still there for the trustee to act as a "financial parent" (in a living trust it would be the backup trustee) to spend for that persons health, education or standard of living expenses (standard of living is for such things as food, housing, clothing, etc.).

The problem, however, is that we have some very clever 18 year olds. Lets say that your 18 year old grandson decided that he would still like to go by that $70,000 corvette. He goes down to the local corvette dealership and tells the dealer that he would like to buy that car. The dealer becomes amused and asks him how he plans to pay for it. Your grandson states that he does not have any money, but he has $200,000 in cash sitting in a trust account. If the dealer will allow him to pledge that money as collateral, he can drive that car off today. Can he?

If the living trust is properly drafted the answer is NO! The trust should contain a "spendthrift" provision. The spendthrift provision has language that does not permit any beneficiary of your living trust to pledge any of their inheritance as collateral to buy anything. If they attempt to however, the trustee would stop making distributions directly to the spendthrift but instead would make distribution indirectly to pay for that spendthrift's health, education and standard of living expenses only while that "cloud" on the trust is in effect or if any further clouds were attempted to be put on the trust inheritance by the spendthrift. The spendthrift provision keeps the spendthrift from doing an "end run" around the age of distribution provision. It keeps the spendthrift from buying things that he could not otherwise afford.