How Can I Keep My Kids From Wasting Their Inheritance?

Q. My wife and I (both 65+) have four children. We want to split our estate four ways when we are both gone. Two of our children are responsible adults. No problem. The other two never grew up and would spend away their legacy on trivia and questionably needy friends. Is there a way we can restrict their use of the inheritance to health/education/necessities?
— Planning ahead

A. Absolutely. Trusts are used in estate planning to restrict the use of funds by the beneficiaries and/or protect inherited assets from creditors of the beneficiaries.

Trusts for your children can be established in your will or other testamentary documents, such as revocable trusts, to become effective upon your death, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park, New Jersey.

Alternatively, trusts can be established by a separate trust document during your lifetime and funded during your lifetime and/or by a direction in your will upon your death, she said. The beneficiaries need not be restricted to just your child but can include a pooled group consisting of your child and grandchildren.

You must name a trustee to administer the trust. The trustee can be an individual or a financial institution or a combination of both, Romania said.

“You must be able to trust this person or persons to make distributions to your child in your child’s best interest and in accordance with the terms of the trust you have established,” Romania said. “Pursuant to statute, the trustee is entitled to be compensated; however, this compensation can be waived or set pursuant to a separate agreement.”

Your trust will set forth the terms of distribution which can be very broad, such as “in my trustee’s discretion,” or more defined, such as “in my trustee’s discretion for the benefit of my child’s health, education and welfare after taking into consideration all other income and assets available to my child.”

Distribution can also be directed to be made at specific ages or for specific purposes, she said.

Romania said including a spendthrift provision in the trust, although not necessary, demonstrates an intent that the beneficiary was not to have the voluntary or involuntary right to assign rights or assets in the trust to third parties, in particular creditors.

In January 2016, New Jersey enacted the Uniform Trust Code. Romania said this body of law becomes effective on July 17, 2016 and now gives us a statutory source for the laws governing trusts.
Romania said you have two difficult questions to consider.

First, do you leave your estate “equally” to all four of your children in trust or only have trust for the two children who have spending issues, with the other two receiving their inheritance outright?

Second, with respect to the trusts you do create, who will be the named trustees to be charged with the administration of the trust and the discretion to make distribution of the trust?

“If you should name the other ‘responsible’ sibling as the trustee, it is possible that it will create hard feelings in the beneficiary sibling if distribution is not made when and how anticipated, which in turn may cause the trustee to act more in the nature of a sibling and less as a trustee,” Romania said.

These laws vary by state, so it may help to do some research on your own or consult an estate attorney regarding your options in a similar scenario.

You can find a simple guide to estate planning and inheritance planning here, and here’s a guide to debt after death, if you’re worried about leaving your loved ones with financial woes. And be sure to get your free annual credit reports every year so you can make sure there are no surprises on yours that might affect your family after your death.