If you've been thinking about your estate plan recently, you probably already have a solid sense of whom you want to inherit your estate. You may wish for it to be left to your children or grandkids.
If this is the case, you may be concerned that leaving a substantial amount of money to them could damage their long-term well-being. Fortunately, estate planners may exert influence over how heirs spend their inheritances. Keep reading to find out the best ways to protect an irresponsible child’s financial future.
Key Takeaways
A no-contest clause can protect your will and disinherit contentious family members.
Stipend inheritance payments can be made using a properly formed continuing trust that identifies a suitable successor trustee.
A spendthrift provision can restrict a beneficiary's interest in trust assets from being transferred to irresponsible heirs.
How Can a Trust Help an Unreliable Heir?
When you establish a trust, you delegate authority to another entity (your trustee) to manage your assets to benefit your beneficiaries. You might appoint a trustworthy family member as your trustee. Your lawyer or bank might serve as your trustee.
Comprehending living trusts is a vital step in protecting your assets against misappropriation. When your assets are under a trust, they are secure against imprudent spending by a beneficiary and any other family members or in-laws who might try to misappropriate your assets.
Estate planning for an irresponsible child is a lot of work. You have to manage an uncomfortable family situation, all while keeping track of scores of important documents and letters. The Trustworthy Family Operating System®, a super-secure digital storage platform, can help you do all that – with features that make accessing and sharing documents simple.
Should No-Contest Provisions Be Included?
The last thing you may want is for a family member to challenge your will or trust after you die. If you believe this is a possibility, just add a no-contest language in your estate planning paperwork. This implies that if someone contests the will or trust, they can be fully disinherited.
Related: Do Wills Expire?
How a Trust Functions
A trust gives you more control over how and when an inheritance is handed to a child by putting a trustee in charge of administering the assets, which is sometimes a trusted friend or family.
The trustee might alternatively be the lawyer who created the trust or a financial entity such as a bank.
Trust assets can be transferred to your kids in installments, providing you some influence over how they are used. There are numerous methods to form a trust, depending on your economic and familial status.
Annuities: Annuities are trusts that disperse inheritances over time depending on a payment schedule that you determine. Payments are typically provided in equal quantities each year.
Incentive trust: Also known as "pay for performance," this refers to any trust in which the beneficiary must achieve certain requirements to receive dividends. Many parents relate distributions to academic achievement, but you may be as creative as you like. Some parents want to tie payouts to more personal life objectives or charitable service.
Trust based on age: You can designate the allocation of the trust based on your child's age.
Income-matching trust: Annual payments are provided in an amount equal to or a percentage of the adult child's earned income.
Stipends vs. Lump Sum Payments for Heirs
Adam Mangiapane, a trust relationship officer at Greenleaf Trust in Michigan, explains: “The primary difference between a stipend and lump sum payments for irresponsible heirs can be significant, particularly in the context of managing inheritance and ensuring financial responsibility.
"Stipend payments are regular, fixed amounts disbursed to an heir over a specific period. They allow for better management of funds, reducing the risk of mismanagement by the heir. Additionally, stipends promote responsible spending habits and budgeting by providing a set amount for a given timeframe."
Mangiapane adds: “On the other hand, lump sum payments are typically a single, large payment made to an heir at one time. This provides immediate access to a substantial amount of money, but it also carries a higher risk of mismanagement and may promote irresponsible spending, as heirs may lack experience in managing large sums.
"Therefore, stipends may be more suitable for heirs who have demonstrated irresponsible behavior, as they promote responsible financial management and provide ongoing support without overwhelming them with a large sum.”
Let’s assume you and your partner are 85. You sit down with your 49-year-old daughter. She's worked hard her entire life, but she's never been good with money and hasn't saved anything. She is exhausted and does not want to work forever, but she is concerned about her retirement.
Assume you tell her, "Listen, honey, we're establishing a trust. After we're gone, this trust will give you $1,000 every month for the rest of your life."
Consider how happy that would make her. "Wait a minute, $1,000 a month for the rest of my life? That's fantastic! Thanks very much, Mom and Dad!"
Then, every month, when the money from your trust arrives in her bank account, your daughter remembers Mom and Dad fondly. You may rest easy knowing that she will have something to live on no matter what happens in her lifetime.
On the other hand, if you just gave her $200,000 in cash, it would be a one-time occurrence. She could make a bad investment or worse. You and the lump sum might be a distant memory in 10 years.
Such arrangements can be established through the use of a trust that identifies a suitable successor trustee: a person, private fiduciary, or bank. You might also simply purchase an annuity that gives her a monthly payout. Discuss these possibilities with your attorney and financial planner when developing an estate plan.
The same optimistic attitude should be applied to other heirs for whom you build a bucket with a "spigot." You may generate a significant financial advantage by maintaining money in a trust fund for a child's inheritance that is correctly managed to increase over time.
If you believe it is prudent to withhold funds from an heir until they are 25, 35, or older, you'll probably want to phrase this arrangement positively.
This process enables parents to offer monetary rewards to their children without leaving them with a big sum that may be easily squandered. And there's no need to bring up their lack of trustworthiness. All they will perceive is the trust fund's assistance.
What About Assets That Aren't Monetary?
You can also provide for your children with non-monetary assets.
For example, you may leave a house in trust to ensure that your child always enjoys the security and comfort of having a place to live. (To prevent your child from selling the property for cash, you may place it in a trust that requires the proceeds from any sale to be reinvested in another house.) You can even designate your child's inheritance to be used to pay off college loans or a mortgage.
When it comes to leaving money to your children, there is no one-size-fits-all answer. You must carefully analyze their demands in the context of their personality and maturity level.
However, given we're talking about irresponsible kids, you might want to put the house in a trust that requires any money from its sale to be reinvested in another house.
Will a Living Trust Prevent Careless Behavior?
Even though a will specifies how your belongings will be divided, many families find that trusts are a superior alternative. Trusts are an important estate planning mechanism because they allow you to place assets such as cash, real estate, and other acquisitions into the account throughout your life.
There are two types of trusts: testamentary trusts and living trusts. Your will forms a testamentary trust after your passing, but a living trust is updated throughout your life.
Living trusts are often revocable, which means they can be altered during the trustor's life and become effective upon the trustor's passing.
Living trusts, unlike wills, don’t have to pass through probate court. Assets can be transferred to your designated recipients instantly and directly.
Use a secure digital platform like Trustworthy to store and share your estate planning documents with ease. Trustworthy's collaboration features allow you to work with your family and advisors to ensure everyone who needs access to the estate planning documents has it.
What Is a Spendthrift Provision?
Another solution to the difficulty of estate planning for an untrustworthy heir is to incorporate a condition in your trust known as the spendthrift provision. A spendthrift provision restricts a beneficiary's interest in trust assets from being transferred.
The trustee is directed by a spendthrift trust on how to disburse the beneficiary's portion of the estate. Paying just for a beneficiary's essential living necessities or giving only restricted deposits directly to the beneficiary are examples of limitations.
If the recipient has a record of mishandling funds or addictive behaviors, a spendthrift trust may be beneficial.
Each spendthrift provision is tailored to the trustor's own choices. For instance, the provision may provide for the preservation of trust assets if your adult child divorces. In rare situations, the trustee of a spendthrift trust might deprive a beneficiary of benefits. The payments might be provided to another recipient instead of that child later.
The trust document might also provide that the trustee only pays payments on behalf of the beneficiary and may withhold direct cash payments from the beneficiary.
The extent to which a spendthrift provision provides protection varies by state. Some states, for example, enable creditors to access a trust containing these stipulations. Under the clause, certain state regulations also allow for child support payments or alimony.
To get the best potential protection, be as explicit as possible about how your assets will be dispersed.
Two such examples:
Only if your adult child is employed or making continuous strides toward becoming fully employed will distributions be paid.
Payments are not to be utilized for specific objects, such as a vehicle, unless the beneficiary can afford to maintain the vehicle.
Every spendthrift provision must be properly drafted to avoid putting the trustee in an uncomfortable situation. A too-stringent provision may prohibit your beneficiary from receiving funds when there is a legitimate need. However, an excessively lenient clause forces a trustee to deal with an irate heir seeking their assets.
How to Create a Spendthrift Trust
Your attorney will assist you in creating a spendthrift trust that meets your specific situation. Here are some inquiries to be prepared to answer:
When/under what conditions would you like the trust to expire?
What should happen to the trust principle if a beneficiary's circumstances change?
Do you wish to make special payments if the recipient has a high expenditure, such as a protracted sickness or college education?
You've labored to ensure your family is cared for today and tomorrow.
Nobody likes to worry about their assets going missing in a few years because of an heir's irresponsible spending or unwise lifestyle choices. Spendthrift trusts can provide you with both safety and independence.
Is It Possible to Disinherit a Child?
Parents can choose to leave nothing to an adult kid.
Younger children may be entitled to a portion of their parents' inheritance if it appears that the parents neglected them — for example, by failing to make a new will after the child's birth — but the conditions are restricted and depend on state law. If you decide not to leave anything to a kid in your will, declare to that effect in the will itself.
You are not required to explain your argument. Simply mention each of your children in the will and indicate that failure to provide for them in the will is purposeful.
Protecting Inheritance With a Prenuptial Agreement
For many families, this is a touchy matter.
You cannot create a prenuptial agreement for your irresponsible child and their soon-to-be spouse. Instead, you'll have to explain to your child why a prenuptial agreement is necessary to preserve their assets in the case of divorce. Some families even insist on a prenuptial (or postnuptial) agreement if the child wishes to inherit the money.
Discussing a prenuptial agreement with your child might be unpleasant or uncomfortable. If you want to assist your child in drafting a prenuptial agreement before they marry, seek legal counsel from an experienced attorney. Prenuptial agreements are highly disputed papers; thus, they must be correctly completed.
How Trustworthy Can Help
Estate planning for an irresponsible child is a lot of work. You have to manage an uncomfortable family situation, all while keeping track of scores of important documents and letters.
Trustworthy helps people in these situations by providing a cloud-based platform where family members can store important documents in one safe place.
It’s important that you store any prenup agreement somewhere safe like Trustworthy. Advanced security features like 256-bit AES encryption and two-factor authentication, and HIPAA and SOC 3 compliance ensure your family's information is protected.
Frequently Asked Questions
Can I change my mind about the trust later?
Yes, if you have a revocable trust, it can be changed or closed down at any time. However, irrevocable trusts are much more difficult to change.
What happens if my child contests the will or trust?
If the court favors your child’s argument, the will can be declared invalid, and the estate won’t be distributed according to the will.
What happens if my trustee mismanages the assets in the trust?
If your trustee mismanages the assets in your trust, they can be removed and held liable for all the damages.
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