July 26, 2023
Lately, I have had many conversations with clients who want to be sure their beneficiaries do not waste away their inheritance. We often think of the common story about a young, inexperienced or imprudent person who inherits a windfall, and soon after they take control of the assets, the funds are wasted away.
A key part of planning is identifying potential spendthrift problems like this. This can be done by reviewing a beneficiary’s history and experience with money and determining if there is a risk to the inheritance.
If there is a risk that the assets would be lost, steps can be taken to remedy or avoid this problem. One step to remedy the issue is to educate the beneficiary on the responsibility they will inherit along with these assets. This can be done by providing an understanding of the work and discipline that went into acquiring and accumulating the wealth they will inherit.
This can also be done by showing the benefits that have come over the years by growing, maintaining and preserving these assets. Many of my clients have businesses and farms they are transferring to children and grandchildren. In these cases — along with the assets that are transferred to the beneficiaries — they are also passing on the understanding that these assets provide a livelihood and a way of life for the beneficiaries.
In some cases, we find that other measures need to be taken to protect assets. Many times, we use spendthrift trusts to protect the assets. These types of trusts often give the beneficiary the right to use the trust assets and provide the trustee with discretion to make distributions of the income and principal from the trust to the beneficiary for the beneficiary’s health, education, maintenance and support.
In these cases, the beneficiary is not given the right to demand assets from the trust. Because the trustee has discretion in making the distributions and the beneficiary is unable to demand assets from the trust these assets are then protected from a divorcing spouse, litigation judgments and creditors in bankruptcy. Our office has seen farms saved because of the application of these spendthrift trust provisions.
For most of our clients, these protections have been applied using gift trusts and separate share trusts. In Minnesota, under statute 501C.0502, a trust has a valid spendthrift provision if the trust restricts the voluntary and involuntary transfer of assets. With this provision, the beneficiary cannot transfer and creditors cannot latch onto the trust assets unless the asset is distributed to the beneficiary. These terms provide the protection needed.
Balzarini is an attorney at law with Hellmuth & Johnson PLLC. Contact him at [email protected].
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