17 Nov Inheritance planning for a spendthrift

Q. My parents want me to be their executor and they plan to give equally to me and my sister. I know she’s bad with money. What can I do to help?
— Sibling

A. Family money scenarios can be fraught with peril because not all family members have the same level of aptitude when it comes to managing their own financial affairs.

And then there are opinions.

Assuming that your parents are still living and if they share your same concern about your sister’s money management, they have the ability to address their concern while they are alive, said Brian Smalley, a certified financial planner with RegentAtlantic in Morristown.

“They can update their estate plan in a manner that the money destined for your sister goes in a manner which would provide her with protection from self-inflicted harm as well as potential creditors,” Smalley said.

One of the more common ways to complete this is to have your parents adjust their estate plan in order that their assets pass to your sister in trust.

“What this means is that instead of the assets passing outright to your sister they become the property of a trust for the benefit of your sister,” he said. “Your parents can put provisions in the trust to make sure that your sister receives income from the trust investments every year and/or has the ability to access the principal for items such as housing, education, maintenance and support.”

Smalley said a benefit to this approach is that there is someone looking over the assets — known as a trustee — for your sister’s benefit. This should help stop your sister from making a mistake with the entire inheritance she will receive.

Your parents could also include a provision in the trust that says at a certain age — or at different ages — part or all of the trust assets can be disbursed to your sister outright, Smalley said.

“This could be a useful provision, especially if your sister proves over time that she can learn to handle her money appropriately,” Smalley said. “An additional benefit to a trust is that it can provide some level of protection over the assets against any creditors of your sister who may come about due to matters such as a divorce or bankruptcy.”

Of course, all of this hinges on your parents making a decision to change their estate plan while they are alive. If they do not, it is important to know that as an executor of your parents’ will, your responsibility will be to fulfill the wishes of your parents that were placed into their estate plan, Smalley said.

If your parents do not account for your sister’s struggles with finances, there will not be much that you can do at that point in time, he said.

But what you can do now is share your concerns with your parents.

Smalley said your parents seem to trust you — they named you as the executor of their estate — so they would probably take your suggestions seriously.

“At bare minimum, if your parents share some of the concerns that you do in regards to your sister’s ability to handle money you can always suggest they speak to their attorney and/or a certified financial planner to discuss their options,” Smalley said.

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This post was first published in November 2016.