Last week, we talked about discussing money with your children at each stage of their lives. By starting to teach them good money habits when they are young, you can set them up for a lifetime of success. In your later years, discussing your own personal situation with them can help make the estate administration process easier once you have passed. But what do you do when, even as adults, your children are not financially responsible? How do you protect them from themselves when it comes to receiving an inheritance?
I often approach this issue in the same way I would for minor children. Since we don’t really know what they will do once they receive the money, I put “guardrails” around them so that they are guided down the path I want them to go. While this can be accomplished in several different ways, my go-to plan is to use a trust that distributes the money in a structured way so that they don’t receive a large amount all at once. This could include a monthly “allowance.” This can provide them with plenty of income to meet all of their expenses and more, but not so much at any given time that they can make poor major money decisions.
Options to consider include a spendthrift provision, age-based distributions of large principal amounts, incentive options such as matching income to encourage employment, and HEMS standards, which stand for health, education, maintenance and support.
A key consideration for all trusts, but particularly for those designed to benefit a financially irresponsible heir, is who will be the trustee of the trust. I’m never a fan of appointing one of your children to be a trustee over the others. If you want to guarantee that your family never gets along again, then make one of them in charge of the other’s money. This is a recipe for family unrest. I suggest using an independent trustee instead. Yes, there are some costs involved, but it is well worth the relatively small fee to maintain family unity. Use a trust protector to allow for the change of trustees if they aren’t performing their duties properly.
A word of caution is that you can make trusts too restrictive. Control is fine, but it can be easy to go so far as to make it too difficult for a beneficiary to get money. Doing so makes a bad situation worse. Be sure to get proper legal counsel before, during and after the process.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS, visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
