You do not want to disinherit your children, but money management skills were not the talents that God has given them. The kids went through Grandma’s inheritance in less than a year. You may not want that to happen to their inheritance from you.
Is there a way in which you can leave an inheritance to your children without having them just blow it? Absolutely! One of the best ways to provide for your children and to protect them not only from themselves, but from creditors and other predators such as scam artists or divorcing spouses, is through lifetime trusts.
With lifetime trusts, your children would have access to their inheritance for their needs. However, if a child has a catastrophic creditor as a result of a car accident, lawsuit or otherwise, the trust assets would be protected from that creditor. Similarly, if a married child never comingles trust assets with marital assets, the trust assets would generally be considered that child’s separate property that would not be subject to a divorce property settlement.
If your child has no money management skills whatsoever, you may want to appoint someone other than that child to be a trustee. In an effort to try to avoid professional trustee fees, you may be tempted to name one of your children who has financial skills to be the trustee of another child’s trust. However, there are few things that can destroy a relationship between siblings like one sibling controlling the purse strings of another.
You may want to appoint an independent professional trustee. That professional trustee controls the inheritance and would have the discretion to dole out the funds as necessary to provide for your child in accordance with your instructions. But what kinds of instructions can you have in these lifetime trusts?
If you have a lazy child who doesn’t like to work, you can put incentive provisions in the trust that say that the child gets nothing unless he or she works. If the child works and presents his or her W-2 to the trustee, the trustee has the discretion to match the W-2 wages. If the child doesn’t work, the child gets nothing from the trust. The child has the opportunity to double his or her earned income by working.
You may have a 40 or 50 year old child who hasn’t grown up and still likes to party like a 25 year old. You may not want the child to party on your money. In that case, you can set up a trust to provide for basic food, shelter and transportation for the lifetime of the child, at the discretion of a professional trustee. However, none of your money could be used to promote a lifestyle for which you do not want to provide. If your child wants to party, the child has to find a job to earn the money to party.
What if your child has some sort of addiction to alcohol, drugs or gambling? You may not want your money to support those habits. Would you want your child to shoot the inheritance into an arm and not likely survive? In those situations, you can put provisions in your trust that would provide for the child and to assist with rehab to overcome the addiction. If, after a certain period of time, your child has not successfully overcome the addiction, then the inheritance could go to the next level of beneficiaries, such as their children.
Your child may not be totally lacking in money management skills, but may need someone to assist them. In those situations, you can make the child a co-trustee with a professional trustee. The child then could learn money management skills from the professional trustee, but would not act alone as trustee. The child could become the controlling trustee after a certain period of time or maybe at the discretion of the professional trustee if the professional trustee deems your child is capable of managing those assets on his or her own.
You may say the heck with it, I’m dead, I don’t care what the kids do with their inheritance. In those situations, you could just leave it outright to the kids, even if they are incapable of managing those funds. Just let them spend it all.
The thing is that it is your money. You can do with it whatever you please. There is no right or wrong way of leaving assets to your kids. If you want to add protections, you can add protections. If you want to let them blow it, let them blow it. It is all up to you.
By: Matthew M. Wallace, CPA, JD
Published edited May-June, 2012 in Savvy magazine as: The ties that bind