When North Carolina residents draft their estate plans, they are sometimes worried that their heirs will be unprepared for a significant inheritance and fritter away assets that they have worked hard all of their lives to accumulate. These concerns may be especially pronounced when heirs are financially inexperienced, have acted irresponsibly in the past or are struggling to overcome substance abuse problems. Placing assets in a spendthrift trust is an effective way to address this issue and protect both estates and heirs.
The language used when drafting the trust documents names trustees and outlines how much control they will have over how and when assets are distributed. Distributions can be scheduled to take place at specific times or left to the discretion of the trustees. Testators commonly include provisions that withhold distributions until heirs reach a certain age or achieve milestones such as graduating from college or maintaining sobriety for a designated period of time.
In addition to giving testators more control over how their estates will be administered, setting up a spendthrift trust provides protection against creditors. This is because the trust, and not its beneficiaries, owns the assets it contains. However, when the assets in a spendthrift trust are distributed, they become available to bill collectors and divorcing spouses just like any other asset.
Spendthrift trusts may be deemed unnecessary when heirs are responsible and of age, but there are many other kinds of trusts and several good reasons for using them. Experienced estate planning attorneys may recommend placing assets in living trusts to avoid the public probate process, and irrevocable life insurance trusts, tax by-pass trusts and charitable trusts are useful estate planning tools for individuals with significant estate tax exposure. Attorneys may recommend using a special needs trust when an inheritance could jeopardize government disability benefits that heirs rely on.