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What is a spendthrift trust?

Thinking of leaving your assets to an heir who simply can't control the way he or she spends money? Worried that your heir will blow through all of the money quickly, wasting what you've put together over the years, rather than using it wisely or saving it?

Don't worry. There's a trust for that.

A spendthrift trust is specifically designed for these situations, and it makes it impossible for your heir to waste the money quickly. At the same time, it still allows you to leave him or her exactly as much money as you desire.

The trust does this by paying out set amounts of money on a regular schedule. This is all done by the person or company running the trust. Your heir never has the entire amount and can never access it, no matter what. Even if he or she has racked up an incredible amount of debt, creditors can't claim the money from the trust.

For example, perhaps you want to leave your son $3 million, but you want it to last. You set it up to pay out $100,000 per year. This way, your son doesn't have to work -- he basically has a $100,000 salary to do nothing for the next 30 years -- but he also can't blow all $3 million in two months and fall into bankruptcy. If he spends outside of his means, owing more than $100,000, creditors can't take the rest. It's not an asset he controls, other than the payouts.

As you can see, trusts give you a terrific amount of control over your assets, even after you pass away. If you want to set one up, make sure you know exactly what steps to take.

Source: The Balance, "How a Spendthrift Trust Can Protect Your Heirs from Themselves," Joshua Kennon, accessed Dec. 08, 2016

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