What Should I Do About an Irresponsible Heir?
You’re pondering what to leave to whom among your heirs as you set about doing your estate planning. One of those heirs, however, is – to say the least – not good with money. It goes through their hands like water for different reasons – living too lavish a lifestyle, being addicted to drugs or alcohol, being involved in relationships that are draining and precarious money-wise, or being too easily influenced by others.
You want to make sure that this person is included in your will or trust but you worry that it would be like throwing money away. What to do?
There are different approaches to handling irresponsible heirs and the inheritance you leave them. Your primary consideration may be that they’ll blow through the money and then have nothing left, except for creditors coming after them.
If you find yourself in this situation in or around Redlands, California, contact The Elder & Disability Law Firm, APC to discuss your options and come up with the solution that best fits your heir's particular needs and behaviors that make a straight asset transfer risky. They have been helping clients since 1991 with all their estate planning needs not only in the Redlands area, but also in the Palm Springs, Rancho Cucamonga, and Riverside regions. Call them for help drafting an optimal solution.
What Is an Irresponsible Heir?
Depending on their ages, your heirs will likely present a pretty clear picture of how responsible they are with money. Perhaps you noticed at an early age that an heir blew through money as soon as it came their way. Give your son or daughter an allowance and it’s gone by the next morning. You may also have people contacting you about your teenage child and debts they’ve run up. Even worse, perhaps they’ve gotten mixed up with the wrong crowd. You have to ponder if they’ll overcome these behaviors as they grow older.
If your heir is already an adult, you may be able to tell about their relationship with money by their employment track record and/or their use of credit. If their focus is on fancy clothes and automobiles that they can’t really afford, that could be a warning sign. Worse, what if they have fallen into an addiction with alcohol or illegal drugs? What about their relationships? Do they let their partner spend, spend, spend at their expense?
These can all be troubling signs that this particular heir may not yet be responsible enough to receive a sudden cash or asset infusion. It’s at this point that you should consider your options.
Options for Dealing With an Irresponsible Heir
No doubt the most extreme approach to an irresponsible heir is to simply leave them out of your will or trust. Few people would go this far, however. Another approach is to set up an annuity, much like retired people often rely on, which pays out periodic benefits, say a particular sum of money every month, but they could always try to cash out the annuity.
One of the most time-honored approaches is to set up what is called a spendthrift trust. Much like a living trust, a spendthrift trust is a legal instrument into which you place some assets and then name a trustee to oversee those assets. In the case of a spendthrift trust, the trustee – given your directions when you set up the legal instrument – will regulate how funds are distributed to the irresponsible heir.
In your trust document, you could direct the trustee to provide a regular stipend, much like the annuity mentioned earlier, or you could direct the trustee to pay only rent and provide for the other essential expenses of life, perhaps upon receiving a receipt. You probably also want to include a provision should the circumstances and habits of the heir change.
What if they finally kick an addiction and embark on a sound lifestyle? Should the trust end and the assets be turned over? You also may want to consider establishing an absolute end date for the trust, at which time (presumably) what’s left in the trust will go to the heir, regardless of the circumstances. Finally, if the heir passes away, what should be done with the trust assets?
One of the primary benefits of a spendthrift trust, other than providing for a reasonable asset distribution path for an irresponsible heir, is that creditors cannot touch the assets inside it. If the heir runs up debts, creditors cannot make a claim against the trust.
Naming a Trustee to Manage the Trust
There are many considerations in how to structure the trust, but perhaps even as big or bigger a consideration is choosing a trustee.
Managing a spendthrift trust can involve not only asset investment and management, but also dealing with the heir. What if the heir is only 18 when you pass away? A trustee might have to manage the distribution of your assets for decades to come. It can be an arduous task keeping the trust in order and carrying out your dictates for distributing assets to your heir. The heir likely will outlive the trustee in this case.
Who to name as trustee becomes a vital decision, and you could deal with this by naming successor trustees to step in for the original trustee when circumstances dictate, or you could hire a professional trustee from a bank or financial institution to do the job. Then there would be no need to have a line of succession, but it would also require the trust funds to pay the institution.
Bestowing Non-Monetary Assets
Another option is to allow the heir the use of certain assets that belong to the trust, for instance, a home to live in. The heir would not be allowed to sell the property without the trustee’s consent, and that should probably only be allowed if the heir needs to relocate to another area or purchase a home more suited to their needs and desires. They cannot willy-nilly take out loans against the property or refinance it since it belongs to the trust.
Reliable Guidance You Can Depend On
As you can see, there are many considerations in creating a spendthrift trust, requiring that the legal document be drafted carefully and in sufficient detail to cover any eventuality. For this, you will require the services of an estate planning attorney experienced in setting up spendthrift trusts.
If you’re in or around Redlands, Rancho Cucamonga, Palm Springs, or Riverside, contact the estate planning team at The Elder & Disability Law Firm, APC. They will meet with you, discuss your unique circumstances and those of your heir, and present you with your best options going forward for your peace of mind and for the future well-being of your heir. Reach out today.