Estate Planning When Heirs Lack Money Skills
It’s not easy for parents to admit that their child is not trustworthy, cannot manage money or makes bad decisions. There are several different ways to address this in estate planning.
It’s a dilemma that many aging parents face: an adult child cannot handle money. How can you leave such a child an inheritance when you are afraid they will squander the money, lose it to unscrupulous friends or spend it on drugs? According to NJ 101.5 in its post, “When you don’t trust a child with money,” an estate planning attorney will be able to help you explore the options.
There are some children, regardless of age, who need help managing their finances. By the same token, there are also some children who are good with money who make mistakes upon inheriting a large sum of money all at once. What would your 21-year-old self do if you inherited a million dollars?
If you think that a child needs restrictions, it’s always a good idea to look into your options with an experienced estate planning attorney. If this is done to protect the child from himself or herself, there is really nothing unfair about this type of plan. In fact, this action may actually help and not be seen as “unfair” treatment. We, as estate planners, often encounter “responsible” children who run into financial hardships due to spouses with bad spending habits or influential friends with extravagant lifestyles.
If parents have concerns about a child’s ability to handle an inheritance, they can leave their inheritance in trust for the child’s benefit. When creating the trust, a trustee must be named. It probably shouldn’t be another child, which could create unrest in the family. Rather, you might designate a trusted family member, friend, or advisor as successor trustee, or you could use a financial institution that provides trust services. There are several third-party companies that could manage this burden and relieve the stress that comes along with being a trustee.
The terms of the trust can be customized to the child’s needs and could stipulate that he or she receive a fixed percentage of the assets each year from the trust. This alleviates much of the discretion on the part of the trustee regarding whether or not to make a distribution. Another option is to allow the trustee to decide the amount and timing of distributions. Trusts can be customized for each situation. Setting up a lifetime trust may be beneficial when a child is expected to always have issues with his or her finances. Preparing trust with a fixed timeframe for distribution or outright distribution may work best for a child who is responsible.
Speak with an experienced estate planning attorney who can help you determine what kind of trust will work best for your particular situation. Together, you will be able to devise a strategy that provides you with peace of mind and protects your children as well.
