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Spendthrift beneficiary? Consider an annuity as an inheritance option

by Legacy Plan
November 17, 2023

Why should an annuity be used instead of a spendthrift trust for a beneficiary who is irresponsible with money? When it comes to leaving an inheritance for a loved one, responsible financial management is often a major concern. For beneficiaries who have demonstrated a consistent pattern of irresponsibility or an inability to handle money wisely, choosing the right option becomes crucial.

While spendthrift trusts have traditionally been used in such cases, annuities present a compelling alternative that can provide enhanced protection and financial. One of the key advantages of using an annuity over a spendthrift trust is the level of control it affords the person providing an inheritance.

Unlike with trust funds, in which trustees are responsible for managing and distributing assets to beneficiaries, annuities allow individuals to dictate how and when payments will be made. By structuring the annuity according to specific terms and conditions, those leaving an inheritance can exert greater influence over their beneficiaries' spending habits while still ensuring they receive necessary financial support.

Another advantage lies in the inherent protection that annuities offer against creditors or legal claims. Spendthrift trusts may provide some level of protection against creditors; however, they can still be subject to court orders or judgments in certain circumstances.

In contrast, annuities enjoy significant legal safeguards that shield them from such claims up to certain limits defined by state laws. This added layer of protection ensures that even if a beneficiary encounters financial trouble or legal entanglements, their inheritance remains intact and secure.

Furthermore, annuities offer considerable flexibility in terms of payment options. These financial instruments can be structured as immediate or deferred annuities, depending on one’s particular needs and objectives.

For example, if there are concerns about immediate access leading to reckless spending habits, a deferred annuity can ensure periodic payments begin after a specified period has elapsed (for example, five years). This delay provides an opportunity for the beneficiary to mature, seek financial guidance or undergo any necessary personal development that may influence their financial responsibility.

The flexibility of payment options helps ensure that beneficiaries have an opportunity to grow and learn before gaining access to their inheritance. When it comes to ensuring a legacy that promotes responsible financial management, annuities can be an invaluable tool in safeguarding the beneficiary’s future and the intentions of the person providing the inheritance.

While spendthrift trusts are a common estate planning tool used to provide inheritance money to beneficiaries who tend to be financially irresponsible, annuities may provide an alternative approach with greater advantages.

How spendthrift trusts work

A spendthrift trust is intended to provide financial support to a beneficiary while limiting their control over its assets. A trustee manages and distributes funds to the beneficiary according to the trust rules. Typically, distributions are periodic and restricted to specific purposes. This prevents beneficiaries from recklessly spending down principal.

Spendthrift trusts have many advantages for beneficiaries lacking money management skills. The structured payouts create lifelong financial support and prevent premature trust depletion. However, there are also weaknesses to consider.

Disadvantages of spendthrift trusts

While spendthrift trusts curb overspending, they can create other issues including:

  • Ongoing trustee duties. Administering trust distributions and enforcing rules creates substantial responsibilities for trustees, often family or friends taking on the role. This can strain relationships over time.

  • Beneficiary dependence. Beneficiaries rely on trustees for financial needs, requiring constant interaction. Frequent requests for additional funds beyond scheduled distributions may frustrate trustees.

  • Fees and costs. Trust administration and management generate expenses funded by the trust. This slowly erodes principal.

  • Limited oversight. Beneficiaries may find loopholes to circumvent spending restrictions, limiting the trust's effectiveness. For example, beneficiaries may take out loans using future trust ditributions as collateral.

In light of these potential issues, alternatives like annuities warrant consideration for beneficiaries requiring structured financial management.

How is an annuity used as an inheritance tool?

When an annuity is utilized as an inheritance tool, the principal is transferred to purchase an annuity contract selected to align with the goals of restricting beneficiary access and preventing rapid depletion of funds. These contracts are structured by insurance providers to offer varied payout options including lump sums, lifetime guaranteed income and other payment schedules dictated by the contract terms.

The key distinction from other inheritance vehicles is that professional annuity providers take over administration and are obligated to fulfill the payout terms set forth in the contract. Beneficiaries in turn receive the scheduled distributions based on the provisions established for that particular annuity. Any remaining balance left in the annuity upon the beneficiary's death then passes to secondary beneficiaries named in the contract.

To effectively achieve spendthrift trust principles using an annuity inheritance, deliberate considerations must be made in how the annuity is configured. For a beneficiary known to be fiscally irresponsible, deferring the start of payouts restricts initial access to funds. Establishing fixed periodic payments instead of lump sums provides reliable ongoing income while preventing depletion of the balance.

Lifetime payouts guaranteed regardless of account balance assure lifelong financial security. Limiting withdrawal and accelerated payment abilities curtails impulsive access. Setting defined age requirements prevents early withdrawals as well.

Annual payment caps control total spending power and prevent excessive draws. With proper structuring guided by these considerations, annuities can be optimized to serve as an alternative to spendthrift trusts for beneficiaries requiring financial management oversight.

Annuities share spendthrift trust qualities of deferred, scheduled payouts up to certain limits. Annuities avoid many spendthrift trust pitfalls since beneficiaries interface with insurance providers instead of family member trustees.

Advantages of an annuity vs. the disadvantages of a spendthrift trust

When weighing the relative advantages and disadvantages of annuities versus spendthrift trusts, properly structured annuities emerge favorably in many regards. A key differentiator is the professional management of the annuity by the insurance provider, which replaces the extensive administrative duties required by a trustee overseeing a spendthrift trust. This greatly reduces burdens on family member trustees and eliminates pressures they may face from beneficiaries requesting additional distributions or exceptions to the established rules.

With an annuity contract, the payments are fixed and restricted according to the contractual terms only, allowing for less room for beneficiary negotiations outside of the agreed upon provisions.

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Annuity fee structures also tend to be lower compared to the ongoing expenses required for trust administration, allowing more principal to be preserved over time. There is also typically tighter control over payout scheduling and restrictions with an annuity contract versus a spendthrift trust, with less opportunity for creative beneficiary circumvention.

When structured effectively, annuities can avoid many of the potential drawbacks and pitfalls inherent in spendthrift trust arrangements.

While no approach can fully prevent beneficiary overspending, annuities offer advantages that complement spendthrift trust principles. Annuities deserve strong consideration as an alternative inheritance vehicle for chronically irresponsible beneficiaries requiring financial protection and management.

Creating the annuity inheritance

If an annuity is determined to be the optimal tool to provide an inheritance for an irresponsible beneficiary, careful planning and setup is critical to ensure its effectiveness. First, the annuity owner should work closely with an experienced estate planning attorney to legally structure the arrangement within a will or trust document specifying the intent to purchase an annuity for the named beneficiary.

For example, the will may state that upon the death of the testator, $500,000 from the estate shall be used to purchase a deferred lifetime annuity for a beneficiary incapable of managing lump sums wisely.

Next, the testator should confer with a financial professional to research and select the best annuity product and provider based on the beneficiary's circumstances. The financial professional can help define optimal contract provisions to balance necessary payment controls with flexibility to evolve if the beneficiary's needs change in the future. For a young beneficiary, this may mean a 20-year deferral period before payments start.

The testator should take care to choose a highly rated insurance company with strong protections in place to serve the beneficiary's best financial interests. To fund the annuity inheritance, assets can be directed to purchase the annuity upon death, either with one lump sum or via ongoing contributions from an inherited trust.

The irresponsible beneficiary should be named directly on the annuity contract, along with secondary contingent beneficiaries like the beneficiary's children to receive any annuity balance remaining upon the spendthrift's death. Trusted advisors should be granted oversight authority on the contract to ensure adherence to the annuity terms. Finally, clear supporting documentation should accompany the inheritance to explain the rationale and intended use in order to avoid confusion or conflict later on.

While not a panacea, annuities offer a compelling option for beneficiaries unable to responsibly manage lump sum inheritances when configured properly. Annuities prevent the rapid depletion of principal while still providing lifetime security and financial support. For beneficiaries prone to money mismanagement, annuities deserve strong consideration as an alternative to spendthrift trusts.

Examples of using an annuity for a spendthrift beneficiary

Here are some real-life examples of using an annuity instead of a spendthrift trust for an irresponsible beneficiary:

  • Jane's son, Alex, often makes impulsive purchases and has accumulated substantial credit card debt. In her will, Jane directs $300,000 to purchase a deferred annuity for Alex that won't start payments until he turns 50 years old. This ensures Alex has income later in life but can't squander the inheritance now.

  • Matt's brother, Brian, has a gambling problem and money management issues. Matt works with a financial professional to purchase an annuity with lifetime income payments for Brian. This provides Brian a consistent monthly income stream but prevents withdrawing large lump sums to gamble away.

  • Amanda's granddaughter, Sophie, is 19 years old and still maturing in terms of financial responsibility. In her trust, Amanda directs the trustee to use $400,000 to buy an annuity for Sophie with deferred payments until age 30. This prevents Sophie from recklessly spending down the inheritance while still young.

  • Eric's daughter, Lisa, struggles with substance abuse problems. In his will, Eric allocates funds to purchase an annuity that will provide Lisa with regular payments for living expenses and medical bills but has limits on taking lump-sum withdrawals. This gives Lisa financial support without enabling access to large sums of cash.

  • Nancy's son, Jacob, has special needs and requires financial oversight. Nancy works with an attorney to arrange an annuity inheritance for Jacob that pays a set amount monthly and is structured to supplement any government benefits Jacob may qualify for. This provides stable income without disrupting eligibility for needs-based assistance.


When leaving an inheritance for beneficiaries who struggle with financial responsibility, finding the right instrument is crucial. While spendthrift trusts have traditionally filled this role, annuities have emerged as a compelling alternative that avoids many of the drawbacks of trustee-managed trusts. The professional administration, creditor protections and payment flexibility of annuities allow benefactors to exert greater control while still ensuring beneficiaries receive needed support.

With the ability to dictate precise payment terms and restrictions, annuities enable inheritance structuring customized to beneficiary circumstances. Deferred payments and periodic disbursements prevent impulsive spending while still supplying income for essential needs. For beneficiaries prone to money mismanagement, the oversight and longevity advantages of annuities make them an attractive option over trusts alone.

Careful configuration of annuity inheritances, with guidance from legal and financial experts, helps align distributions to beneficiary capabilities and limitations. When thoughtfully incorporated into estate plans, annuities provide benefactors peace of mind knowing their legacy will remain impactful for both irresponsible beneficiaries and future generations. Annuities ultimately create an opportunity for beneficiaries to grow into financial responsibility with stable support sustained over their lifetime.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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