Stopping your spendthrift kid from wasting his inheritance

Photo: Dee Golden of Morguefile.

 Q: I have two adult children. One is very responsible with money, and the other is in debt and seems to make bad decisions. I don’t plan to leave this world anytime soon, but should I consider a trust — and what kind — to make sure my hard-earned money isn’t wasted by my heirs?

A: You’ve got plenty of options.

Consider establishing a spendthrift trust for the benefit of the child with financial problems, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.

“The trust instrument should designate an independent trustee who has the discretion to decide how much should be paid to or on behalf of the child,” Whitenack said. “The trust instrument can be drafted so that the child’s creditors cannot claim against the trust assets.”

As the beneficiary, the child has no control over the trust assets, so he or she cannot unwisely spend the money in the trust, she said. Spendthrift trusts are also a prudent alternative to protect inheritances for beneficiaries who are financially stable but who may be employed in fields where there is a risk of malpractice lawsuits against the beneficiary, Whitenack said.

Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park, offered some additional detail.

“The trust will be funded with such amounts set forth in your will, whether that be a dollar amount or a percentage of your estate,” she said. “The terms of the trust should include guidelines for mandatory payments and/or discretionary payments to one or more named beneficiaries and may distinguish between allocation of income earned by the trust and the trust’s principal or corpus.”

It should also provide for termination of the trust upon a triggering event, for example, when the beneficiary reaches the age of 30 or upon death of a beneficiary, Romania said, and set forth how the remaining funds should then be paid/distributed at the time of the terminating event.

Romania offered this example: A will may provide that the testator’s estate is to be divided equally to his/her two children but further direct that one child receive his/her bequest outright while the other child’s bequest is held in trust due to that child’s younger age, inability to handle finances, or other personal or medical issues. A trustee will be appointed (generally a parent’s sibling or other trusted friend) and directed to pay all income to the beneficiary, but in this particular case only pay principal to or for the benefit of the beneficiary for purposes of health, education or support. By contrast, the provisions of the will could provide the trustee with more broad powers, permitting the trustee to make distributions to the beneficiary in the total discretion of the trustee. In addition, the trust may direct that a portion of the trust be distributed at particular milestones, such as graduating a college or university, purchasing a home, or reaching the age of 50, she said

“Alternatively, an intervivos trust can be established by a separate written trust document created during your lifetime which trust is then funded either with gifts during life or by bequest under your will,” she said. “This type of trust is useful where a beneficiary has special needs and/or where it is anticipated that gifts or inheritances will be received from multiple parties.”

It is important to consult with an attorney knowledgeable in estate planning and tax matters when creating a trust. If the trust is prepared improperly, it can have detrimental consequences, such as the estate or beneficiary incurring taxes that could have been avoided, requiring a court proceeding to have a trustee appointed or obtain interpretation or revision of the trust terms to permit the trustee to act in accordance with the testator’s or grantor’s intent.

Email your questions to moc.p1582535777leHye1582535777noMJN1582535777@ksA1582535777.

This story was first posted in November 2014.
 
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.