Every family has one. They are pretty easy to spot. We refer to them as the “financially irresponsible beneficiary.” Usually, they come in two different packages. The first have little or no resources and may or may not be gainfully employed. Any money that crosses their fingers is spent immediately. The second group presents differently. They bought the house they could not afford and the luxury cars to go with it. Debt is never a dirty word to their ears. More than cavalier, they believe that their financial resources are endless. They currently work in decent jobs, but have had career setbacks in the past and may have more in the future. If and when things go south, these individuals will seek the financial support of those in their family. Family members setting up their estate planning must take these financially irresponsible beneficiaries into account and prepare accordingly.
Direct bequests or distributions to a financially irresponsible beneficiary provides no protection for those assets. Past behavior is not always an indicator of future results, but smart estate planning takes into account all of the available information. Oversight is not a punishment. Making sure a loved one is financially secure is a bedrock of estate planning. Wills and Trusts provide the necessary structure to protect a financially irresponsible beneficiary from their own poor decision-making.
Trust planning whether as part of a testamentary trust in a Will or intervivos Trust can set aside funds for their use over time. Spendthrift trusts allow the Trustee to make discretionary payments on behalf of the beneficiary or distribute funds as needed so that preservation of Trust assets are prioritized. Scheduled distributions can also be directed by the Trust – from monthly allowances to annual payments depending on the beneficiary’s level of irresponsibility. Pools of money handed to a financially irresponsible beneficiary is a bad idea. Once that pool is gone it cannot be easily replaced. Incremental distributions allow for asset replenishment through sound management. Beneficiaries may incentivized to work smarter if there is no lump sum in their immediate future.
There are also financially compromised beneficiaries. Picture a young professional with an outrageously large student loan debt burden who is a competent money manager, but may need financial help throughout his or her life. Though the fear of insolvency is not as acute, debt will govern career and housing decisions. Trust planning could alleviate some uncertainty and allow this beneficiary to choose a more personally satisfying career and preferable housing option.
Including the financially irresponsible beneficiary’s children in an estate plan is another way to protect assets and make sure that the beneficiary’s family unit remains strong. Creating sub-trusts to ensure educational, housing and daily living expenses are paid offers additional security to a family that may suffer from poor financial management.
Aging parents of financially irresponsible children have to navigate tricky family dynamics. Balancing the interests of the responsible children with those of the irresponsible children may bring hard feelings. Unequal distributions are a recipe for resentment. Equal distributions with Trust planning and oversight is a more fundamentally fair approach to maintain family harmony. Contact the professionals at Sloan and Feller today for more information on planning for a financially irresponsible beneficiary.