Leaving someone an inheritance is an act of care. But an outright payment may create problems if the beneficiary struggles with spending, gambling, addiction, or pressure from other people. A trust can provide support while giving someone you choose responsibility for managing the money.
In Illinois, a spendthrift provision generally prevents a beneficiary from transferring an interest in a trust before receiving it and limits a creditor’s ability to reach that interest. It can be included in a trust you create for a loved one. It does not have to be a separate trust with “spendthrift” in its name.
A Spendthrift Provision Is Only Part of the Plan
A spendthrift provision and a trustee’s power to make distributions do different jobs. The provision addresses transfers and creditor claims. The distribution terms determine when and how the beneficiary may receive money.
For a beneficiary who may have difficulty handling a lump sum, I may recommend a continuing trust that gives the trustee discretion to pay for needs such as housing, education, health care, or other support. The trustee might pay a provider directly rather than hand the beneficiary cash. The trust can also allow distributions as circumstances change.
That flexibility can be more useful than a rigid schedule. An automatic payment at a certain age may arrive at precisely the wrong time for someone dealing with an addiction or financial crisis. I discuss that issue further in Using Trusts to Protect Children With Addiction Issues.
What Protection Does an Illinois Trust Provide?
A properly drafted trust can offer meaningful protection while assets remain in the trust. It is not an absolute shield. Illinois law recognizes exceptions to spendthrift protection, including certain child-support claims. The treatment of a required distribution can also differ from that of funds the trustee still has discretion to retain.
It is equally important to distinguish protection for a beneficiary from protection for the person creating the trust. Putting your own assets into your revocable living trust generally does not keep them beyond the reach of your creditors during your lifetime. If protecting your own assets is the goal, that calls for a different discussion. My asset protection overview addresses that broader subject.
Choose the Trustee With Care
The trustee may have to make sensitive decisions and occasionally say no. Choose someone who can manage money, keep records, communicate respectfully, and exercise sound judgment when the beneficiary’s needs change. In some families, an independent individual or professional trustee is a better fit than a sibling or other close relative.
The trust should give that person useful guidance without attempting to predict every future circumstance. I cover the practical considerations in How Do I Choose the Best Trustee for My Living Trust?.
Consider Taxes and Retirement Accounts Before Naming a Trust
A continuing trust may have income-tax costs, particularly if it retains taxable income. Trusts reach higher federal income-tax brackets at much lower income levels than individuals. That cost should be weighed against the protection and control the trust provides.
Retirement accounts require separate attention. If an IRA or 401(k) names a trust as beneficiary, the trust language and beneficiary designation must be coordinated with the applicable required minimum distribution rules. The trustee does not always have to pass every retirement-account distribution immediately to the beneficiary. A trust may be designed to retain distributions, but that choice can affect both taxes and the timing rules.
A spendthrift provision may be enough for one family. Another may need a longer-lasting discretionary trust and a carefully selected trustee. I help Naperville-area families make that decision based on the beneficiary’s circumstances and the assets involved. If you are concerned about leaving someone an inheritance outright, contact me to discuss the options.