Will Your Adult Children Quickly Spend Through a Lump Sum Inheritance?
These days, parents with adult children of almost any age must be concerned with how their offspring will manage a lump sum inheritance. Historically, estate planning concerns about protecting an heir's inheritance focused on minor children and young adults. Today, however, parents with children who may soon be eligible for Social Security themselves must be wary of leaving a lump sum inheritance to their heirs.
Most seniors and Baby Boomers who plan to leave inheritances to their children have accumulated their estates through hard work, disciplined investing, and frugal spending. As parents, they typically want the assets they leave behind to provide some amount of financial security for their family. Unfortunately, it is possible for spendthrift heirs to spend through a lifetime of savings in a matter of weeks or months. When adult children inherit money, they usually spend it as they spend their own money, or even more carelessly. See
greedy heirs.The story on the right is an example of a recent estate administration that illustrates how spendthrift heirs can squander an inheritance.
How Heirs Can Squander a Large Inheritance
Denise and Jimmy are siblings age 34 and 36. When their mother, Francis, died eighteen months ago, they each inherited a lump sum of 225,000 dollars. Denise lived with her mother before her death and still lives in her mother's house. Jimmy lives rent free in an apartment his uncle owns. Both drive cars purchased by their father. Francis paid most of her adult children's expenses until her death. Denise has had a few part time jobs through the years, but Jimmy has barely held a job since graduating high school. He has been in and out of rehab seven times for drug problems.
Although Francis owned a substantial amount of property and two successful businesses, she never gave much thought to her estate plan. She had an attorney draft a simple will leaving her estate in equal shares to her children. Her attorney tried to provide advice on the advantages of other estate planning methods such as trusts, but Francis refused to listen. She didn't want to spend money on attorneys' fees. She firmly directed her attorney to prepare her will according to her instructions, disregarding his concerns about how the children might quickly spend through their inheritances. As a result, when Francis died, Denise and Jimmy received their inheritances in a lump sum.
Now, just a year and a half later, Jimmy and Denise have both spent through their inheritances. The estate Francis left them was accumulated over three generations of hard work by Francis, her parents, and grandparents. If properly invested, the money each child inherited should have been enough to pay their limited expenses for several years. If Francis had left her estate in trust instead of an outright bequest, she could have ensured her children would be financially secure for a much longer period of time. Instead, Jimmy and Denise are pleading with other relatives for money to pay their bills. Denise has applied for a bank loan and wants her father to cosign. Having squandered their inheritances, both children are becoming desperate.
Whether your heirs are minor children, young adults or adult children with poor spending habits, using a trust to pass your estate is often a much better option than leaving a lump sum inheritance in a will. You can name a trusted friend, relative or professional to serve as trustee. The trust can be written to include instructions on when beneficiaries are to receive payments from the trust and in what amounts. An alternative is to grant the trustee discretion to determine the timing and amount of payments for expenditures on behalf of beneficiaries. In the case described above, Francis could have named her younger sister or brother as trustee.
There are several types of estate planning trusts you can use to prevent your heirs from receiving their entire inheritance at one time. To find out which type of trust you should use, consult an attorney about your unique circumstances and objectives. In this case, Francis could have used a spendthrift trust. A spendthrift trust would have been beneficial because Jimmy and Denise both have a history of problems with creditors.
A lawyer can advise on the most suitable type of trust for your estate plan based on factors such as: the age of your heirs, the size of your estate, tax concerns, how you wish trust property to be used, concerns about the spouses of your adult children, and the type of property that will be used to fund the trust. See finding an attorney.