From the time you take them home from the hospital, you, as a parent, fuss, fret and sometimes obsess over protecting and providing for your children. You worry if your baby is eating enough. You labor over picking a new house that will be in a good enough school district to meet your pre-teen's academic needs. You stress over the choices your teen makes in terms of friends… and dating partners. Even once your children become adults and take on independent lives of their own, you, as a parent, don't just automatically stop worrying about them and stop wanting to protect and provide for them.
One of the clearest ways that you can protect, and provide for, your loved ones is by taking steps to protect the financial legacy you desire to leave behind for their benefit after you die. Using one or more trusts in your estate plan can be a very helpful way to do that. You can insert provisions in your trust that act as safeguards for the wealth you ultimately want your child to enjoy.
These provisions are often called by names like “spendthrift trusts,” but the benefits that these trust devices can provide to you and your family is actually much more broad-based than the name implies. Judging solely by the name, you might think that these planning tools are only useful for families where a beneficiary is extremely irresponsible or otherwise bad at handling wealth. You might find yourself saying, “All of my children are upstanding, responsible adults with stable lives and careers, and strong moral/ethical foundations. Our family has no spendthrifts, so this doesn't apply to us.”
That's not necessarily true because, as noted, this tool helps more than just families with a spendthrift child, a child with a gambling addiction or a gullible child who is notoriously poor with money. One area where this protection is evidence is when it comes to litigation. Without the proper protections in place, the distribution you've planned for your child could be in jeopardy if he/she finds him/herself under a court order stating that he/she owes an amount to another person.
There are two common ways this can happen. One is divorce. Even your most upstanding, responsible child could, one day, find him/herself being sued for divorce. A divorce judgment could dictate that your child is obligated to pay his/her ex-spouse a sum of money. The ex-spouse could potentially be entitled to pursue your child's inheritance you gave him/her and take it to fulfill this court-ordered obligation.
Another way this can happen is a lawsuit. Maybe a guest or a service provider got hurt while on your child's property, or maybe your child was in an auto accident that the police determined was legally your child's fault. These scenarios could lead to personal injury lawsuits where your child is the defendant. The case could then possibly end up with a verdict in favor of the person suing your child and a large money judgment in that person's favor. If that happens, it may be possible that the wealth you had intended for your child to enjoy could end up in the possession of this other person in order to satisfy this legal judgment.
Your estate plan can help guard against this. A properly drafted and executed spendthrift provision can potentially block your child's creditors, including civil plaintiffs or ex-spouses, from going after the assets you've put into that trust for your child's benefit. With this barrier in place, you will have once against served as protector and a provider for your child.