Estate Planning for Irresponsible Adult Children
An important aspect of developing an estate plan is assessing how financially responsible your adult children are. It’s critical to be realistic with this analysis because you won’t be around to pick up the pieces if your adult children squander their inheritance. If your adult children are young, have special needs, are prone to alcohol or drug abuse or have a history of losing jobs and/or failed businesses, it might be best to put their inheritance into a trust rather than transferring funds outright. In such cases, it’s a good idea to speak to an estate planning attorney about how putting their inheritance into a spendthrift trust could provide for them while protecting the assets.
What Is A Spendthrift Trust?
A spendthrift trust is a way to control how an inheritance is distributed to adults that might not have the skills or personality to handle large amounts of money successfully. The assets are placed in a trust managed by a trustee that you appoint. It’s usually either a relative, the attorney that drafts the trust or a financial institution. The drawback of appointing a relative is that they are much more likely to succumb to pressure for additional funding than a neutral party. That’s why the fee charged by lawyers and banks is usually money well spent. There are many different types of spendthrift trusts. These are some examples:
Age Based Trust: Distributions are increased when the child reaches age landmarks such as 21, 30 or 35. The weakness of this strategy is that it could make large amounts of money vulnerable to a divorcing spouse, creditors or financial predators who become aware of the trust’s timetable.
Incentive or “Pay For Performance” Trust: In addition to providing regular payments, this type of trust awards additional distributions when stated goals are met, such as graduating from college or passing the bar. Your adult child may be insulted by this arrangement, so it’s best used only when absolutely necessary.
Income Matching Trust: Annual distributions are made to match the child’s earned income or as a percentage of their income. Very wealthy parents often utilize this type of trust to promote a work ethic for their children. It’s a poor strategy for children with special needs or who lack the ability to support themselves.
Annuities: The inheritance is distributed on a payment schedule, which is typically either monthly or yearly. Annuities are appropriate in a wide variety of scenarios and are the type of trust that’s least likely to insult your children.
Non-Monetary Assets
Another way to distribute assets safely to immature or irresponsible offspring is to pass assets in non-monetary form. For example, a house can be placed into a trust and used by the child with the trust specifying that the proceeds from the sale of the home must be reinvested in another similar property. This can also be done with vehicles, boats and other types of property. It’s important to remember to provide funds for the property’s upkeep and to only use this strategy for adult children that are able to properly care for property.
These are some examples of ways to safely pass assets to immature or irresponsible offspring, but each family's circumstances are different. That’s why it’s important to consult with an experienced estate planning attorney who can help you develop the right plan for your family.
