Entrusting an Inheritance to a Spendthrift Child – Charitably
By Katherine McKay
Many people are perplexed about how to leave inheritances to their children, especially adult children with overactive spending habits. Here are a few of the questions we get asked in the Planned Giving office of the Salvation Army, and some of the solutions we offer.
Q. I have two adult children: A son who goes through money like water in a sieve and a fiscally responsible daughter. I’m reluctant to leave my son an inheritance, because I fear he will squander it quickly and have nothing left. I’ve talked to my daughter about leaving everything to her with directions to “take care of your brother,” but I’m worried that this places too much responsibility on her. What should I do? P.S. I am not rich.
A. First of all, know that you are not alone. In fact, having an adult child as you described is very common. It can be challenging to acknowledge your love for them with a final gift from your estate and, at the same time, preserve the feelings you have about the value of money. Some parents simply write the child “out of the will.” But that can leave a bitter legacy – a final admonishment that the child did not live up to your expectations.
Perhaps a more loving solution is to transfer money to your son in smaller amounts over his lifetime. That way, he would not have a one-time lump-sum gift to mishandle. At your death, for example, your daughter might receive 50 percent of your estate outright. Your son’s 50 percent share could be placed into a plan that provides him with a monthly income. Over the course of his lifetime, he could receive more actual dollars from the inheritance than your daughter did initially. She, however, will have her money available immediately, for spending or investing.
Q. What happens to the inheritance when my son dies?
A. You could designate that the money remaining in the plan go directly to your favorite charity. That way, even if your son squandered his monthly income, a portion of his inheritance would ultimately go to an organization you care about. By the way, this type of plan also generates a very nice charitable deduction for you while you are still alive.
Q. Is there a way to prevent him from wasting the income he receives from the plan?
A. Typically, your son would be able to spend the income any way he chooses but you can opt to have a trustee pay specific bills of his, or living expenses. This requires much more administration and responsibility on the part of the trustee, but can work well as long as the trustee is comfortable enforcing the parameters set out by the trust. The trustee can be your daughter, a bank’s trust officer, or even the Salvation Army.
Q. Can my son’s creditors get his inheritance?
A. If your son has serious debt problems, creditors might gobble up any inheritance that goes straight to your son in a lump sum. If you protect the inheritance by placing it in a plan that parcels out an income, the creditors cannot reach the principal. They may, however, be able to force your son to pay off some of his debt with the income he receives from the plan.
Q. I don’t want my son’s wife getting my son’s inheritance either. Can I protect it from her?
A. Yes, you can establish the plan so that only your son receives the income payments. Since he does not have access to the principal, neither does your daughter-in-law. If your son and daughter-in-law divorce, she would not be entitled to any part of the principal invested in the plan.
Q. What are these plans called and are they expensive to establish?
A. There are two basic plans. The first, called a charitable trust, usually requires a minimum of $100,000 to be placed in the trust (either during your lifetime or at your death). You may need to revise your will so that it is consistent with the trust. You will need an experienced estate attorney to create the trust and codicil to your will. It could cost $2,000 to $8,000, depending on the complexity of the trust.
The Salvation Army charges no fees to administer trusts that will ultimately benefit the organization. A bank’s annual fees can cost 1 to 3 percent or more of the value of the trust. Still, these costs are a good value, in my opinion, when compared to a squandered inheritance.
The second option is a charitable-gift annuity. Setting up a charitable annuity during your lifetime that guarantees your son a fixed income for the rest of his life does not require a lawyer. It will also, as noted above, generate a significant tax deduction for you right now. If you do not want to tie up your money before you die, you will need to modify your will so that the charitable annuity is established by your executor immediately after your death. Charitable gift annuities can be funded with as little as $5,000, and have no administration fees.
Q. What if I prefer to treat both children equally?
A. Instead of giving an outright inheritance, you could opt to put both children in the trust or charitable-gift annuity plan. Even the most frugal child might appreciate inheriting a steady income stream for the rest of her or his life.
No parent can raise every child exactly the same way. We vary the rules based on each child’s personality, maturity, and behavior. Inheritances don’t need to be exactly the same either. I believe it makes sense to make your final, loving gift be one that accommodates each child’s spending style while accomplishing your good intentions.
