Discretionary Trusts and Spendthrift Beneficiaries

Sometimes, one wants to leave an inheritance to a beneficiary, but the beneficiary is not a person to whom large sums of money or valuable assets can be safely given. In a previous article, we discussed using discretionary trusts to provide for someone with a disability who might lose their disability benefits if they inherit too much. This article will discuss a distinct but similar question: How can I leave an inheritance for someone who cannot manage money?

Unfortunately, many folks struggle with some version of the question: How can I leave a legacy of long-term support for my child or grandchild who struggles with substance abuse, gambling, a vulnerability to financial abuse, or poor taste in spouses? Discretionary trusts can be valuable tools to address these concerns, offering significant protections for assets and beneficiaries. Discretionary trusts are sometimes called spendthrift trusts when explicitly used to address these considerations. “Spendthrift” is just an old-timey word for someone who is terrible with money.

Discretionary spendthrift trusts allow trustees to decide when and how trust assets are distributed to beneficiaries, allowing for tailored support. They are specifically intended and designed to protect vulnerable beneficiaries. Trustees are given broad discretion to determine what support should be provided and when. Such trusts enable trustees to manage asset distributions carefully, protecting trust assets from beneficiaries’ creditors or imprudent spending habits and protecting beneficiaries from the harms that can arise from sudden windfalls.

Windfall inheritances can severely exacerbate substance abuse problems and mental health challenges, providing individuals with ample resources to fuel their addictions or dangerous behaviours without addressing underlying issues or seeking proper treatment. Unfortunately, this can sometimes result in serious harm to or the untimely death of the recipient of a windfall.

Individuals who are grappling with mental health challenges or substance abuse may also be susceptible to exploitation by unscrupulous individuals seeking to capitalize on their newfound wealth, leading to financial exploitation and further harm. Substance abuse and severe mental illness can also lead to legal troubles, including fines, lawsuits, or criminal charges. Inheritance without safeguards may subject assets to seizure, jeopardizing beneficiaries' financial security.

Discretionary spendthrift trusts can offer vital protections against risks associated with inheritance by people who cannot be relied upon to protect inheritance and manage assets wisely. By providing controlled asset distributions and safeguarding beneficiaries from financial exploitation and the harms of excess, these trusts can help to ensure assets serve their intended purpose while preserving beneficiaries' well-being. By protecting the assets from the whims and creditors of imprudent beneficiaries, discretionary trusts can offer a cautious and responsible way to allow one to support a beloved spendthrift.

By working with qualified professionals to proactively attend to the kinds of considerations addressed in this article, individuals can build a robust foundation for a well-executed estate plan that aligns with their overall goals and reduces the risk of leaving an unintentional legacy of expense, conflict, or outright harm. This can be a challenging process. It requires carefully considering the details of one’s assets, wishes, and goals. It also requires keen attention to one’s family structure and dynamics as well as the relevant legal and tax considerations.

Careful planning like this is always a worthwhile exercise. An ill-conceived estate plan (or, worse, the lack of a plan entirely) can have two primary undesirable outcomes: (1) significant expense, delay, confusion, and prolonged legal conflict for surviving family and beneficiaries, and (2) a few estate litigators get to purchase bigger boats and go on nicer holidays at the expense of your estate and family members.

If you have any questions about estate planning involving discretionary trusts or any other estate planning or administration matters, we can be reached here.