We all love our children. And if we’re 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 assets 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 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 child 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 benefits. State laws vary on what this amount is, but it is generally around $1,700 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 trusts effective, keep in mind the following principles:
Be realistic
Make sure the goals are attainable for your children. The perfect 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 midpoints may seem like too much even to attempt for someone early in recovery. Set some reasonable early and midpoint 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 test 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.
Build in an emergency plan
You may want to give your executor some flexibility in the event of an emergency, such as an unexpected disability, illness, injury or other event beyond your beneficiary’s control. Build in an escape hatch to allow for the unexpected in life.
