Spendthrift Heirs - What To Do?

[FLJim]

Over 40 years ago I married a single mom and her 3 kids, 5, 7, & 9 at the time. (We had none together, and i have none from any relationships). All of a sudden (!!!) we are in our 70's, long retired, enjoying a NW of 5MM+ or so. Problem is that all 3 kids are devoid of money/saving/investing/management skills and might be called spendthrifts. All have good jobs, but nothing but debt to show for their hard work. (We tried teaching them and apparently failed.) Time to re-do our estate plan. Leaving each one a $2MM inheritance is reminiscent of the many stories of lottery winners squandering all their winnings and then declaring bankruptcy. Wife and I are, naturally, both emotionally involved. Would welcome any thoughts on how to make inheritances a blessing and not a curse.

 

[LateToFIRE]

Similar NW to yours - probability models suggest it will be somewhat larger by the time I'm your age. There are potentially some spendthrifts in our estate plan. Sure, DW and I could go about setting up trusts and trying to manage things from the grave, but what I've seen in closing out estates for others, it is really hard to anticipate what will be what when you're gone. And frankly, I just don't have the energy to do that much planning for when I'm dead. The people we intend to help, we will help well before I'm gone. It will be much more meaningful to them and us. As for the will - most of it goes to charitable institutions we care about. No single person in our estate plan gets more than $500K, which is plenty (in current dollars) to smooth over some of life's rough edges. We update the plan every 3 years like clockwork and adjust amounts.

P.S. You might consider telling you kids that inheritance will be limited and most goes to charity (or you maybe you'll set up a charitable trust) if you suspect their behavior is based on expecting a windfall. Then, even if you don't do it, they won't be expecting too much and would be in for a big surprise.

 

[aaronc879]

Do you have any siblings that could really use some financial help? You don't have to give all of it to your kids. I do believe that most if not all money should stay in the family but it's your to do what you please with. As long as they are not going to spend it on drugs then I say let them enjoy it. Of course spend down all you want to live well for your remaining days then give them the rest. If they are middle age then they are likely set in their ways.

 

[MichaelB]

If there are grandchildren, perhaps money can be left to them or used for their education. Another option is to leave the money in a trust that is distributed in smaller amounts over a longer period of time.

 

[pb4uski]

One option might be to leave instructions all or a substantial part of their "inheritance" be used to buy a life annuity for them so they are less likely to squander it... so rather than getting a lump-sum like a lottery winner, they would get $x per year like the lottery option that nobody takes.

Or perhaps a combination of a small lump sum with an admonition that you hope that they use it wisely along with monthly annuity payments for life.

While technically they could sell the annuity payments for a lump sum, you can't control that and hopefully they won't figure it out.

 

[jebmke]

Three options come to mind.

ONe (perhaps harsh): don't leave them anything
Two: Spendthrift trusts
Three: Leave it to Donor Advised Funds that they can use to donate to charities of their choice so they have something other than cars and drugs to spend it on.

 

[Aerides]

Are your children otherwise good decent nice kind people? So they haven't saved and have debts...that's a whole lotta people in their late 40's.

I wouldn't let that change the decision on what to leave them, but the trust angle might be helpful.

 

[MarieIG]

A little up front and a spendthrift trust?

 

[FLJim]

Do you have any siblings that could really use some financial help? You don't have to give all of it to your kids. I do believe that most if not all money should stay in the family but it's your to do what you please with. As long as they are not going to spend it on drugs then I say let them enjoy it. Of course spend down all you want to live well for your remaining days then give them the rest. If they are middle age then they are likely set in their ways.

I am an only child. My wife's older sister could use some help - that's a good idea.

 

[FLJim]

Are your children otherwise good decent nice kind people? So they haven't saved and have debts...that's a whole lotta people in their late 40's.

I wouldn't let that change the decision on what to leave them, but the trust angle might be helpful.

Yes they are good, decent, kind people. Just not "good with money"

 

[MikeTN]

I think it's a great idea to help the wife's sister. however with respect to the spendthrift kids I favor creating a revocable living trust. Any money that is not already in an IRA or 401K goes into the trust. The kids get the IRAs at death of you and your spouse, and they have 10 years to spend them. Trust pays only earnings to the kids for 10 years, then the trust ends by buying each a life annuity. You can use money from the trust to pay grandkids college tuition if you wish.

 

[OldShooter]

One option might be to leave instructions all or a substantial part of their "inheritance" be used to buy a life annuity for them so they are less likely to squander it... so rather than getting a lump-sum like a lottery winner, they would get $x per year like the lottery option that nobody takes.

Or perhaps a combination of a small lump sum with an admonition that you hope that they use it wisely along with monthly annuity payments for life.

While technically they could sell the annuity payments for a lump sum, you can't control that and hopefully they won't figure it out.

I think this is the best idea. A trust would be more flexible, but more complicated and expensive.

The negative with an annuity (or a poorly designed trust) is that if someone experiences a catastrophic event the payout cannot be adjusted to accommodate. For example, terminal cancer where 24x7 home health care would be desirable. If the payments stream can be sold, that is another negative. No way to prevent this, @pb4?

The negative with a trust is the hassle of writing the thing and then the ongoing expense of a professional trustee. But the flexibility is 100% and any professional trustee has years of experience saying "no" to beneficiaries asking for extra money. "Grandma told me I could buy a Ferrari."

Another thing to consider is giving a good chunk of the estate to charity. In our case it will be about 1/3. We're giving through our local community foundation. A $million or two will have huge impact on the lives of multiple people who have not been as fortunate as your beneficiaries. (https://cof.org/page/community-foundation-locator) I'd encourage you to visit the nearest community foundation to hear their story.

 

[Jerry1]

IMHO, there’s no value to trying to manage someone’s life from the grave. I have one daughter with our three grandkids and the other daughter with no kids. DW thinks up some convoluted way to make sure the grand kids get money. Sorry, our will states the two daughters split our estate 50/50. DD with the grand kids is poor with money but not terrible. Will grandkids get anything? I don’t know and when I’m gone, it won’t matter.

Once you’ve exhausted other uses for your estate (charity, other family . . .), give the money to the kids and RIP. You’ve done well for them. They’ll be how they are regardless.

 

[harley]

Have a good time. Spend as much as you want. Leave them whatever is left.

 

[Dash man]

Set up a trust and have it managed by Schwab Trust Company or whoever you choose. Invest in dividend growth ETFs and have the income paid out to your heirs. Pass it on to the grandkids after. The dividend growth with give them a raise every year.

 

[Route246]

Have you thought about an "incentive trust" which many wealthy parents setup for their children. In your case the kids are grown so you would have to invent different incentives from matching salary, awarding money for getting a degree, etc.

I have thought long and hard about this. I think back to my formative years and beyond and if someone had just left me money it would have tended to reduce my incentive to work hard and save. It is human nature.

The best I can come up with is a savings match incentive dividend arrangement, something like a 401-K match but this would be based on total assets in savings. Qualified savings (what we call investable assets here) would receive an incentive dividend. Qualified savings would have to increase in order to qualify for next year's dividend. It would incentivize non-savers to think about starting to save in order to get this match.

Our trust attorney said she does this frequently for well-heeled clients when they voice similar concerns. She told us to write up notes on structure, etc. and she would write up the trust document.

Just a thought. Good luck on this.

 

[JBTX]

Have a young adult spendthrift and also a special needs child. Our plan is to pass on our estate via spendthrift/special needs trusts, to be managed by a local bank corporate trust company. They charge around a 1.0%, which seems worth it for someone who just is not good at all managing money.

 

[EastWest Gal]

If there are grandkids, start 529 plans for them now or contribute to an existing 529 plan. There are tax penalties if the money is used for anything other than qualified tuition and expenses for the beneficiary. You can gift five years at once without gift tax consequences, which is $85K.

 

[latexman]

Idk if this is possible, but if the inheritances could be stipulated to match the NW of each beneficiary (up to $2M each) and then with the remainder of the $2M each buy each a life annuity.

As soon as the ink is dry on this change, have a will reading so they know.

This may give them incentive.

Bad idea?

 

[DrRoy]

The things I would say are already above. What do you think now?

 

[Lewis Clark]

Idk if this is possible, but if the inheritances could be stipulated to match the NW of each beneficiary (up to $2M each) and then with the remainder of the $2M each buy each a life annuity.

As soon as the ink is dry on this change, have a will reading so they know.

This may give them incentive.

Bad idea?

Interesting idea. Using financial assets instead of net worth might be better since net worth is hard to calculate.

One possible downside could be that this encourages a spendthrift to borrow money to increase the financial assets just before the measuring point, to inherit more cash up front. A spendthrift might not be clever enough to repay the loan.

Seems like a lot of unnecessary work to me.

 

[iloveyoga]

Have a good time. Spend as much as you want. Leave them whatever is left.

Whenever I try to think this through, I land here ^^

 

[mrfeh]

One anecdote regarding trusts:

A member of my family (via marriage) put their substantial estate in a trust that was only to be used for certain expenses by the 4 children. Offspring weren't very happy about the situation, and went to court to get access to all the funds.

It took a year or two, but they managed to do it, so a trust may not be impervious.

 

[Gumby]

If I were trying to do something like that, I would have an in terrorem (no contest) clause. Whoever challenges the trust automatically forfeits their share to the charity of my choice.

 

[marko]

If there are grandchildren, perhaps money can be left to them or used for their education. Another option is to leave the money in a trust that is distributed in smaller amounts over a longer period of time.

+1. Look up "Lottery Winner's Syndrome".