How can you protect a money gift from a spendthrift’s bad habits?


Q. My grandmother wants to gift money to me and my two siblings, but she said she’s worried they won’t spend it wisely. What kinds of protections can she attach to the money? I was thinking maybe she could invest in an IRA for them so they’re not going to just use the money right away for something irresponsible – is that a good idea?
— Trying to help

A. You are a fortunate individual to have a generous grandmother.

There are options, but it’s not always simple.

First, investing in an IRA for someone does not prevent the funds from being misused, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

That’s because the IRA is in the name of the person receiving the gift and not your grandmother’s name, he said.

So while there would be a tax on early distributions and possibly penalties, that may not stop them from taking out the money, Hook said.

One way to protect the money would be to gift it to a trust for the benefit of each of your siblings.

“The terms of the trust can restrict their use of the funds. Your grandmother can name an independent trustee responsible for carrying out the terms of the trust,” he said.

He said the trust can be as rigid or flexible as your grandmother wants. It can lay out ages or other requirements for accessing the monies. It can also leave it up to the independent trustee to make those decisions, he said.

The drawback to a trust is that it can be expensive to create.

“An attorney is used to draw up the Trust, so the legal fees must be considered. Also, if the trust lacks flexibility, it may not accomplish what your grandmother intended for the funds,” Hook said.

Finally, trusts are separate taxpaying entities.

“Trusts pay higher taxes at lower taxable income levels. There are ways to mitigate the taxes paid by a trust, but that involves making income distributions to the beneficiaries of the trust which may defeat the purpose of the Trust for your grandmother,” Hook said.

If a trust does not make sense, other possible solutions are to gradually gift the funds to your siblings rather than giving them the money all at once, or establishing criteria for using the funds, Hook said.

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This story was originally published on May 5, 2023. 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.