Estate Read Time: 3 min

When Heirs are Imperfect

Passing your estate to an heir with credit problems or a gambling or alcohol addiction might not only lead to that wealth being squandered, but the inheritance could worsen the destructive behaviors.

Of course, you don’t want to disinherit your child simply because of their personal challenges. There are potential solutions that allow parents to control and incent behaviors long after they are gone, ensuring that a troubled child’s inheritance won’t be misused.1

Some Common Approaches

A trust is one idea, since it can pass wealth to an heir while maintaining control over the how, when, where, and why the funds can be accessed.2

When establishing such a trust, you can appoint a trustee, who is typically an independent, third party (e.g., trust company) or family member. Appointing a family member, however, may be fraught with problems. Hypothetically speaking, who do you think may be better able to resist the pleadings of a desperate beneficiary? A close relative or a corporate entity?

Furthermore, the trust can specify the precise circumstances under which money will be paid to its beneficiary, or it can specify that the trustee will retain complete discretion in the disbursement of funds.

Structuring Ideas

Trusts can also include incentives, such as requiring drug or alcohol testing before the funds are paid out, or perhaps, that a lump-sum payment be made only upon graduation from college.

To ensure that an heir is committed to change, lump-sum amounts can be paid out after prescribed periods of time, e.g., five years of sobriety. To encourage your heir to seek gainful employment, the trust might pay out a dollar for every dollar in wages. Alternatively, the trust can be written whereby payments are made directly to service providers, like a landlord or utility company.

Trusts can be flexible in their design, but before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
2. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

 

Related Content

Understanding the SECURE Act 2.0

Understanding the SECURE Act 2.0

A timeline covering a few of the major provisions of the SECURE Act 2.0.

Tax Efficiency in Retirement

Tax Efficiency in Retirement

What role would taxes play in your investment decisions?

Social Security: The Elephant in the Room

Social Security: The Elephant in the Room

Some people wonder if Social Security will remain financially sound enough to pay the benefits they are owed.

 

Have A Question About This Topic?







Thank you! Oops!

Systematic Withdrawals in Retirement

Taking regular, periodic withdrawals during retirement can be quite problematic.

Retirement Questions That Have Nothing to Do With Money

Things to consider before retirement.

Life and Death of a Twenty Dollar Bill

How long does a $20 bill last?

View all articles

Self-Employed Retirement Plans

Estimate the maximum contribution amount for a Self-Employed 401(k), SIMPLE IRA, or SEP.

Federal Income Tax

Use this calculator to estimate your income tax liability along with average and marginal tax rates.

Saving for Retirement

This calculator can help you estimate how much you may need to save for retirement.

View all calculators

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

Managing Your Lifestyle

Using smart management to get more of what you want and free up assets to invest.

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

View all presentations

The Other Sure Thing

Though we don’t like to think about it, all of us will make an exit sometime. Are you prepared?

It Was the Best of Times, It Was the Worst of Times

All about how missing the best market days (or the worst!) might affect your portfolio.

Questions to Consider When Buying a Vacation Home

Doing your research is key before buying a vacation home.

View all videos