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Make Sure the Kids Don’t Blow Their Inheritance

A couple with four children may want to split their estate four ways when they pass away. However, what do they do if two of their children never grew up and would spend their legacy on extravagances and questionably needy friends?

A recent New Jersey 101.5 article, “How to plan for spendthrift children,” recommends the use of a trust. Trusts are used in estate planning to restrict the use of assets by the beneficiaries and/or to protect the inherited assets from the creditors of the beneficiaries.

A trust for children can be established in the parent’s will or other testamentary documents—like a revocable trust—which will be effective upon his or her death. Another way to do this is to create a trust in a separate trust document during the parent’s lifetime. This is then funded during his or her lifetime and/or by a direction in the will at death.

The parent will have to designate a trustee to administer the trust. This can be an individual or a financial institution or a combination of both. This should be a trusted individual who will make distributions to the child in his or her best interest and in accordance with the terms of the trust.

Trustees are typically entitled to be compensated, but that compensation can be waived or set in a separate agreement.

For example, the trust can set forth the terms of distribution. This language 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.”

In addition, the distribution of funds can be directed to be made at specific ages (e.g., 21, 30, or 40) or for specific purposes like education or a first home. A spendthrift provision in the trust, which may not be necessary, shows the parent’s intention that the beneficiary was not to have the voluntary or involuntary right to assign rights or assets in the trust to third parties, especially his or her creditors.

Whatever you decide to do, be sure you get it done through a qualified estate planning attorney.

Reference: New Jersey 101.5 (May 5, 2016) “How to plan for spendthrift children”

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