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How to Leave Money to an Heir Who"s Bad With Money

You've invested, built your fortune, and now you want to pass some of it on to your heirs. If you have been extraordinarily lucky, your children and grandchildren are well-grounded, established, successful people who are responsible in every way. If you are living in the real world, however, this may not always be the case.

The solution? Create what is known as a spendthrift trust. In short, a spendthrift trust is a trust account overseen by a trustee, such as your bank or private banker, that controls the assets you leave after you've died.

The beneficiary is forbidden from spending the money before he or she actually receives distributions and the trustee has the authority to determine what payments are necessary according to the trust agreement. For example, if you left $5 million to your favorite nephew, and the trust account generated $250K per year in income that was paid out to him, he couldn't pledge the trust assets as collateral. If he did spend more than he was able to support - say, for example, he bought a $3 million house - the credits would simply be out of luck. The only cash they can collect from your nephew would be his $250K distribution, keeping the assets in place, generating dividends, interest, and other income safely and securely for decades to come.


Limitations on Self-Designated Spendthrift Trusts

If this great protection from creditors exist, why not simply create a spendthrift trust and name yourself beneficiary? Most states won't allow this. There are some exceptions, specifically the Alaska Trust, but you need to contact an estate planning attorney for advice.

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