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A spendthrift trust can protect heirs from their own habits

You love your children, but you know that they're not great with money. Growing up rather wealthy, they take money for granted, not realizing how hard you had to work for it.

You're worried that leaving your wealth to them directly is a recipe for disaster. You're reminded of people who never learned how to deal with money properly, won the lottery for $20 million, and blew through all of that money in a matter of years. They were left with nothing. You don't want your children to do the same thing with their inheritance.

A spendthrift trust may be the answer you're looking for. It can help to protect kids from the poor decisions they would make.

Essentially, rather than leaving them the money, you just put it in the trust. The rules of the trust then govern how it is to be used.

For instance, you could set aside money for mortgage payments, tuition bills and other necessary expenses. You could even dictate that the children get a set amount -- far less than the full value of the trust -- on an annual basis to use as they see fit. Many parents tie the size of these payouts to age, giving the children more money as they get older and more responsible.

The trust keeps the children from spending everything at once. It can also lay down rules against frivolous spending. For instance, if a friend asks for a new car, your son or daughter can't withdraw the money to use for that purchase. This can often stop financial mistakes before they occur because the heir doesn't control his or her own wealth.

If you want to set up a trust like this, make sure you know exactly what legal steps to take.

Source: Forbes, "Protect Your Children From Themselves With A Spendthrift Trust," Rob Clarfeld, accessed March 23, 2018

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