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How to Leave Money to Someone Who Can't Handle Money

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How to Leave Money to Someone Who Can't Handle Money

Financial Advice | Financial Planning
Design your incentives and conditions thinking of the heirs you actually have, not the heirs you wish they were.

We all love our children. And if we are blessed with a legacy to leave behind we all want them to enjoy it. 

But some of our adult children are more mature with handling money than others. Many families have grown up children who have issues that preclude leaving them any significant asset in a lump sum as it could quickly be squandered. 

For example you may not want to leave a lump sum to children with the following issues:

  • Spending or a shopping addiction. 
  • Alcoholism.
  • Drug addiction. 
  • A spendthrift or untrustworthy spouse. 
  • A history of ill advised financial risk taking. 
  • Creditors that would come after them if they ever owned any significant assets directly. 
  • Special needs that require assistance via Medicaid or other need based social service benefits if inheriting money would disqualify them from receiving benefits until they spent all their inherited money. 
  • The child is a minor or legally incompetent.

    If any of the above situations apply you should consider meeting with an attorney who is experienced in the areas of family law, estate planning and special needs planning.
    And one of the things that should be seriously looked into is the formation of a trust.

    What is a trust? 

    A trust is a legal entity designed to hold and distribute money for a beneficiary or group of beneficiaries.

    When you die with proper planning your children will not inherit your wealth directly. Instead the assets would come under the ownership of the trust. And when you set up the trust you can determine the circumstances and criteria by which it will release money to the beneficiary.

    Of course after your death you won't be around to do it directly. But you can write the instructions into the language of the trust and leave it up to an executor to follow them on your behalf.

    For example you can write language into the trust to accomplish the following:

    *Conversion of assets into a stream of income to be paid out only over the life   expectancy of the beneficiary or for a specific number of years.
    *Release of funds based on a series of milestones, such as graduation from high   school, graduation from an accredited drug or alcohol rehabilitation program,   marriage or upon reaching a certain age.
    *Release of only a specific amount each month that will not disqualify your child from   receiving Medicaid or other government benefit. State laws vary on what this amount   is but it is generally around $1700 per month or less.
    *Release of funds contingent upon the beneficiary continuing to pass drug and alcohol   tests or staying out of trouble with the law.

    To make these conditional trust effective keep in mind the following principles:

    Be realistic
    - make sure the goals are attainable for your children. Perfection may be the enemy of the good. Your children are not perfect people just as you aren't. Design your incentives and conditions thinking of the heirs you actually have, not the heirs you wish they were.

    Set reasonable milestones - for someone with a lifetime of addiction a month of sobriety is a major achievement and a five year goal with no mid points may seem like too much even to attempt for someone early in recovery.  Set some reasonable early and mid point objectives to help them along their path.

    Be specific - make benchmarks crystal clear so there is no room for argument with the executor. Either the drug tests came back clean or it didn't. Either the college student graduated with a bachelor's degree or got a GED or he didn't. Gray areas are nothing but trouble.