I loved Brewster’s Millions starring Richard Pryor and John Candy. Richard Pryor’s character had to spend $30 million in thirty days to inherit $300 million. A nice problem to have, I guess.
Estate planning is vital, especially if you want to efficiently pass your assets to the next generation, but what to do if a family member is a black sheep, a bad seed, a wayward child, a lost soul, or a spendthrift? The easy thing to do is eliminate them from your will, but it’s not the correct answer because it may cause permanent damage to your family.
If you’re concerned your child will recklessly spend their inheritance, there are several actions you can incorporate today to protect your nest egg and the relationship. Let’s look at a few.
- Establish a spendthrift trust. It’s an irrevocable trust that limits the beneficiary’s ability to access the principal.[1] Your trustee will pay out a percentage of the trust assets according to your wishes. The trust protects your principal, and your child receives the assets over time.
- Set milestones or incentives. You can include targets, limits, or restrictions into your will or trust. For example, your estate can pay a percentage of the assets every five or ten years. It can distribute more funds to your child as they grow older, so they receive more money at age 50 than they did when they were 30. Other targets may include marriage, a job, or a college degree. It’s your estate, so you can get as creative as you want.
- Give them money today. If you’re worried your child will implode when they inherit millions of dollars at once, give them a few thousand dollars now to see how they steward the assets. If you’re confident they can manage money prudently, amend your estate plan accordingly.
- Communicate your concerns. Discuss your estate plan with your children and voice your concerns. An open dialogue is a healthy way to manage a difficult situation. Don’t let your children try to figure out your wishes after you’re gone.
Eliminating a child from your will may cause more harm than good, especially if they have siblings. A sibling rivalry can last for decades. You might win the battle, but you will lose the war. Do you want to be remembered for removing your kids from your estate plan? Probably not. Rather than eradicating them from your will, create an estate plan that benefits all parties.
An attorney friend once told me he makes good money developing an estate plan, but he makes great money when he settles an estate without a will or trust. Don’t delay; create your plan today!
A good man leaves an inheritance to his children’s children, but the sinner’s wealth is laid up for the righteous. ~ Proverbs 13:22
May 25, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
[1] https://www.nolo.com/legal-encyclopedia/spendthrift-trusts.html#:~:text=A%20spendthrift%20trust%20puts%20restrictions,can%20his%20or%20her%20creditors. Betsy Simmons Hannibal, website accessed 5/24/2021
