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It’s possible to draft an estate plan for irresponsible heirs

| Aug 25, 2018 | Uncategorized

Many parents and grandparents worry that after they pass, their heirs will be unable to responsibly manage an inheritance. This is particularly true when an heir has drug or alcohol addictions.

Nobody wants to leave a son, daughter or grandchild with access to money they may use to drink themselves to death or buy drugs and overdose. But it can also be cruel to cut these heirs out of the estate entirely.

Consider a spendthrift trust

Fortunately, it doesn’t have to be either-or. By funding a spendthrift trust, the trust grantor is in essence saving their heirs from themselves and their weaknesses.

Spendthrift trusts aren’t used solely for addicts and alcoholics. Some people are just bad with managing money. They fail to budget, then overspend and wind up in dire financial straits.

Still other heirs may simply quit working lucrative jobs once they inherit significant sums. While this isn’t inherently wrong, the inheritance may quickly be depleted if it becomes the sole source of income.

How a spendthrift trust works

The trust grantor funds the trust and names a trustee to oversee and manage the trust assets, which cannot be accessed or depleted by the heirs. Distributions are then paid out in specified intervals to the heirs according to the trust grantor’s intentions.

These trusts can also be incentivized. For instance, you may set the trust up so that able-bodied heirs must remain employed during adulthood in order to continue to receive disbursements. The problem that can arise here is that some parents or grandparents can be perceived as overly controlling by their heirs.

However, a trust that attempts to control who a person marries or any other deeply personal decision may not hold up to a legal challenge, so any restrictions must be thoroughly researched.

Can an heir’s spouse access the money in a trust?

No, at least not while it is part of the spendthrift trust. However, once funds are disbursed and commingled as marital property, all bets are off and a spouse can make use of the money.

Isn’t this too much micro-management?

Well, that depends. You are in a position to best know how your heirs will react to receiving a lump sum of money. If you fear that it will be their undoing and cause innumerable problems, a spendthrift trust may be the kindest option available to you.

On the other hand, if it’s important that your heirs learn how to handle their own finances, a spendthrift trust may not allow them to develop financial acumen because they remain yoked to the trust and its distributions.

Make sure that you thoroughly research all your estate-planning options before making a final decision.