Gone are the days when most people leave money of some sort to the next generation. With the higher cost of living, nearly non-existent interest on investments, and longer life expectancies, there may not be much left to leave behind. If you do plan to leave money to your kids, you may be up against a growing dilemma. That is, you have at least one child who you hesitate to give an inheritance to.

You may have two responsible adult children, and one who makes you shudder when you think about giving him or her your money. Let’s say it’s your daughter. She might be an alcoholic, a drug user, a gambler, a spendthrift. Maybe she has creditors banging at the door. Or it could be you trust her, but not her husband. Whatever the problem, how do you leave a share of your wealth to her without setting her up to squander it? Depending on how much you have to leave, you might consider establishing a trust.

‘Trusting’ Your Money

Here’s how this works. When you pass away, the trust becomes the owner of the money, and you can leave instructions for specific amounts or percentages to be released to your beneficiaries at certain times, like at ages 25, again at 35, and 45, and so on. Or you can give the beneficiary a designated sum each year. If he or she can’t handle money, it will likely be squandered but at least it won’t be possible to “spend it all in one place” as the saying goes. And ideally, as time goes by your beneficiaries will learn from their mistakes. One can only hope.

If you decide on a trust, you will of course, need to appoint a trustee. Some people ask a friend or relative to fill this role, but keep in mind, it is likely to be a lot of work which can go on for decades.

Alternatively, you could hire a professional trustee. If this is something you are interested in, talk to the trust department at your bank. Obviously there will be a fee, but it might be better to have a professional make sensitive decisions about the release of money.

You may also specify that the trustee can extinguish the trust at a specific point, such when your beneficiary has proven to have been clean and sober for X amount of time, or upon reaching age 45 if addiction is not the issue.

Here are a few points to keep in mind when setting the terms of the trust.

• Be realistic. The goals you set for your kids to get your money should be attainable. Don’t make the provisions so tough that they are doomed to failure. You know your kids are not perfect, any more than you are. So set limits but be realistic.
• Set achievable milestones, like college graduation or a certain number of months of sobriety. Remember what seems normal to you is not normal to an alcoholic. A month of sobriety may be a huge hurdle. If you make the hurdles unattainable the person may give up.
• Establish a plan for emergencies. Give your executor some flexibility. For example, suppose your beneficiary developed serious illness and needed expensive treatment. Add an escape hatch for the unexpected.

Trust or No Trust, Be Clear About Your Wishes

Whatever your decision, be clear. Specify the amounts you want to leave and to whom. Don’t just say “the grandkids.” If you are not dividing it equally (for example one may have special needs such as a disability), make your wishes known.

If you plan to leave a child nothing, don’t assume you can just leave the child’s name out of your will. He or she could claim it was an oversight, so harsh as it may seem, if you intend to disinherit someone, say so. By the way, in the state of Louisiana, a person you disinherit may still be able to receive a portion of an inheritance.

You can attach strings to an inheritance, but some estate planners advise against it. In the movies you see grandiose scenarios where a daughter must be married to get his vast inheritance, or a son must follow in Dad’s footsteps. Those are extreme, but still… go easy on the strings.

Annuities

Another possibility is to purchase an annuity. An annuity is a contract with an insurance company which obligates them to make payments to the beneficiary. Generally these are used for retirement income, but payments can be made directly to a child. You can arrange for regular payments to be made at a set amount, for a certain period of time, or variable payments.

Gifts Instead of Inheritance

If you think one child may not be able to handle the money later, consider making gifts during your lifetime. For example you can give money for a house down payment or to start a business or you help them clear up old bills. Just make it clear to the recipient, “this is your inheritance and there won’t be more when I pass away.” You can give up to $14,000 per year to one recipient. A married couple can agree to split the gifts and give each recipient $28,000. Talk to your financial adviser about larger gifts.

Some Special Circumstances Calling for Trusts

Beneficiaries Who are Minors: If some of your intended beneficiaries are minors, financial advisors generally don’t recommend leaving money directly to them. Even a minor who seems pretty level-headed may not have the maturity to deal with a windfall of money. This is the ideal time to use a trust.

Skip a Generation: If you have reason to doubt your own children will be able to handle money, you can set up a generation-skipping trust, which leaves money to your grandchildren when they reach certain ages.

Dynasty Trust: If you are among the ultra-wealthy, you might want to consider a dynasty trust. This trust is designed to last forever as long as the money holds out. This type of trust can protect your money from the heir’s creditors, spouses, and bad judgments, and avoids some taxes.

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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