Spendthrift Heirs - What To Do?

[athena53]

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.

Three options come to mind.

<snip>
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.

My concern with these potential tactics is that you probably CAN raid a 529 or a Donor-Advised Fund if you're motivated; you just have to pay the nasty tax consequences.

One tactic my elderly Aunt used: She has two kids- one is my favorite cousin, loving, responsible, has taken good care of her mother as Mom aged. The other, her brother, has been on and off of drugs all his life. (Not an issue with the OP's kids, I know.) When I visited them in Atlanta last month, Aunt N had gone into Assisted Living and he was sniffing around to see if the house was up for sale. Aunt N has spent plenty over the years propping him up; what no one knew was that she kept track of it. She was going to disinherit him but the lawyer suggested $100K as an amount that he'd take and run without trying to contest the will. The will mentions how much she's spent over the years. I don't know how much she has but her son-in-law told me he's reassured her that she could live in the facility for 30 years and not have to sell her house (worth $400K and no mortgage). So, $100K is well under 50% of the estate.

 

[WhenIsItTime]

I have similar concern to OP, but trying to address it sooner. I'm making a meaningful amount of money available to my kids when they reach 30 (they are not 18 yet). If all goes well, I'll still be alive and can coach/monitor them and see how they handle it. If they do well, there could be a lot more. If they do not do well, then I'll have to find other family or charities.

In the meantime when they are behaving less than ideal, it spurs me to "blow (some of) that dough".

 

[mystang52]

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.

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.

IMHO, there’s no value to trying to manage someone’s life from the grave. ....... 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.

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

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.

+ 1. (as an aside, these replies, along with the other wise ones, demonstrate what a great site this is. One can ask any question and invariably many helpful suggestions are the result)

 

[marko]

As noted, these are basically "good, decent people" who are just bad at managing money.

My main concern would be subjecting these good people with a large windfall to the point where it messes up their lives. Sudden Wealth Syndrome is real and I've seen it firsthand.

We have one particular niece who, despite being a really good person, would likely end up dead in six months after receiving our inheritance and we've taken steps to insure her survival.

You can't always control things from the grave but very often, attempts to do so do work; breaking trusts can be done but they're more the exception than the rule.

 

[pacergal]

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

Perhaps have part of their inheritance be meeting with financial advisor. This could even be done now.

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

If you have grandkids, make sure their college or trade school is paid for, maybe even give them enough to start out--money for down payment on house, etc.

Don't "rule from the grave". I had a relative do that. It caused frustration on the part of his widow as she could not access extra money when she wanted, and problems with the kids after the mom died.

You can't take it with you. Enjoy it now, maybe even share now with yearly gifting if you don't already.

 

[MarieIG]

My concern with these potential tactics is that you probably CAN raid a 529 or a Donor-Advised Fund if you're motivated; you just have to pay the nasty tax consequences.

One tactic my elderly Aunt used: She has two kids- one is my favorite cousin, loving, responsible, has taken good care of her mother as Mom aged. The other, her brother, has been on and off of drugs all his life. (Not an issue with the OP's kids, I know.) When I visited them in Atlanta last month, Aunt N had gone into Assisted Living and he was sniffing around to see if the house was up for sale. Aunt N has spent plenty over the years propping him up; what no one knew was that she kept track of it. She was going to disinherit him but the lawyer suggested $100K as an amount that he'd take and run without trying to contest the will. The will mentions how much she's spent over the years. I don't know how much she has but her son-in-law told me he's reassured her that she could live in the facility for 30 years and not have to sell her house (worth $400K and no mortgage). So, $100K is well under 50% of the estate.

It is - now. One never knows the future however. It might be safer to leave a percentage of the residual estate, i.e. 5% (after all expenses/ taxes are paid) to that heir, to protect the other son so he is assured to get the lion's share.

 

[TheWizard]

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.

I wonder if that sort of clause is actually legally enforceable?

 

[Out of Steam]

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 have the opposite going on. Our one daughter has tightwad tendencies that follow those of my parents, including significant retirement savings in her late 20s. Though she did just move from a small shared apartment to a shared house, raising her expenses several hundred dollars a month.

I feel somewhat freer than I otherwise would be to support a younger sister who probably needs the money, though haven't made any such plans yet. My wife may also choose to support several grandnieces who she likes. Our daughter will get most of our assets no matter what, though.

The idea of leaving any charitable contributions from our estate in our daughter's hands has some appeal, though the sum may be insufficient for a donor-advised trust to be worthwhile. Perhaps a nonbinding request to give away 10-20% of her inheritance would be best.

 

[athena53]

It is - now. One never knows the future however. It might be safer to leave a percentage of the residual estate, i.e. 5% (after all expenses/ taxes are paid) to that heir, to protect the other son so he is assured to get the lion's share.

That's a good point (although the other child is a daughter). Probably hard to accomplish now, though; Aunt N is now failing mentally and the son could challenge a new will on that basis. I think she's 90+ years old and her assets are unlikely to run down that quickly- she inherited from her never-married sister, her grandson is living in her house that she vacated and is paying rent, and she gets a good survivor pension from SS and her late husband's job. I'm hoping that my cousin takes the $100K and runs when the time comes. His sister and her husband are doing fine on their own (he's retired, she works PT because she wants to, house is paid off) so they don't need the extra $$.

 

[MarieIG]

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 wonder if the ownership of the annuities could remain with the trust with the trust making the payments - to prevent alienation . . .

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.

I would do that as well.

 

[MarieIG]

That's a good point (although the other child is a daughter). Probably hard to accomplish now, though; Aunt N is now failing mentally and the son could challenge a new will on that basis. I think she's 90+ years old and her assets are unlikely to run down that quickly- she inherited from her never-married sister, her grandson is living in her house that she vacated and is paying rent, and she gets a good survivor pension from SS and her late husband's job. I'm hoping that my cousin takes the $100K and runs when the time comes. His sister and her husband are doing fine on their own (he's retired, she works PT because she wants to, house is paid off) so they don't need the extra $$.

Yes - if there is a question about competence at this point . . .

 

[FLJim]

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

Lots of great ideas that I truly appreciate. There is so much knowledge and wisdom here in this forum.

 

[OldShooter]

... Perhaps a nonbinding request to give away 10-20% of her inheritance would be best.

The will can simply give the desired amount(s) to the decedent's desired charities. Note that charities should specifically receive TIRA money where possible because they will benefit from 100% of the money tax-free.

 

[MarieIG]

I wonder if that sort of clause is actually legally enforceable?

It probably depends upon the venue - and may depend upon the totality of circumstances.

 

[euro]

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.

I haven't read the whole thread yet, but I'm sure there are countless good approaches to this. DW and I have 2 kids - we made available to them any and all educational options, including grad school, if desired. They took very different paths, but both now are in good places. We have been trying to instill charitable giving in them all along, but for some reason, we failed terribly. Neither of them has any interest at all in supporting charitable causes. There is always hope that things will change once they get a little older, but so far it hasn't happened. Well, charitable giving is important to DW and I, so we recently adjusted our wills/estates to split our assets into 50% to charity (we established a list of recipients), and 25% each to our kids. This way we can make sure they still get a good inheritance, but also ensure our charity goals. Obviously, you could adjust those percentages in may different ways, depending on your specific situation, but we are pretty comfortable with our current split.

 

[ivinsfan]

I'm curious about your definition of spendthrift. It means different things to different people. The odd thing is you say it's all 3 so is it them or is it you not understanding the costs of the modern day world?

 

[pb4uski]

I wonder if the ownership of the annuities could remain with the trust with the trust making the payments - to prevent alienation . . .

That's an interesting idea... so the beneficiaries of the trust could not sell the annuity cash flows to JG Wentworth or whoever because the trust is the owner. I suppose that the trust could even have the annuity payments paid directly to the trust beneficiary. I like it.

 

[marko]

I wonder if that sort of clause is actually legally enforceable?

It probably is. Had a grand uncle who, year's ago decided to challenge the conditions of the family trust in court. It didn't end well for him. He lost and per the conditions of the trust he had to forfeit ten years of payments. As he had never really worked at a real job, it was a very long ten years.

 

[MichaelB]

The annuity is a good idea. It’s simple and easy to manage. Even inside a trust, it provides a predictable and steady stream of income.

The downside to the trust is 3rd party trustee fees can be expensive. If it can be set up at a lower cost institution, such as Vanguard, it is worth pursuing.

The upside to a trust invested in equities and fixed income is the income stream is not guaranteed or predictable, so it can’t be sold, and the assets can’t be accessed by the recipient.

 

[MarieIG]

That's an interesting idea... so the beneficiaries of the trust could not sell the annuity cash flows to JG Wentworth or whoever because the trust is the owner. I suppose that the trust could even have the annuity payments paid directly to the trust beneficiary. I like it.

Those commercials make steam come out of my head. The annuitant gets a lump sum significantly below the value of the annuity (and likely it disappears in short order).

 

[OldShooter]

This trust stuff is a little like juggling with hand grenades -- seek competent instruction. Specifically, IIRC trust income tax rate is in the low 30%, so some careful design of cash flows may be necessary to minimize this. For example, our estate plan has trusts that hold TIRAs. TIRA withdrawals are taxable to the trusts if the withdrawal amount is not paid to the trust beneficiary in the same tax year. This effectively limits the trusts to 10 years because anything retained in the trust will be taxable to the trust.

 

[MarieIG]

This trust stuff is a little like juggling with hand grenades -- seek competent instruction. Specifically, IIRC trust income tax rate is in the low 30%, so some careful design of cash flows may be necessary to minimize this. For example, our estate plan has trusts that hold TIRAs. TIRA withdrawals are taxable to the trusts if the withdrawal amount is not paid to the trust beneficiary in the same tax year. This effectively limits the trusts to 10 years because anything retained in the trust will be taxable to the trust.

Do we know how much OP has in traditional IRAs? If not much, OP may wish to keep them out of the trusts altogether, and leave them directly to charities?

Yes, I totally agree about seeking competent assistance/ counsel regarding the setting up of estate documents to effectuate OP's wishes while being cognizant of tax consequences.

 

[HI Bill]

While I have no heirs past my wife, I would do this:

Give even percentages to each of the kids and their kids. How they deal with the gift is theirs to own. A gift is a gift, and if one doesn't have the skills to preserve it, them that's on them. I might suggest adding investment recommendations in the will, but people are people, and they'll do what they'll do. If you tie strings to the inheritance, or give it away to someone else, there will likely be bad feelings in the family for decades, whether they're warranted or not.

I've learned that spending priorities vary from person to person, and what seems to be a necessity to one, is a waste of $ to another.

 

[SunGuy]

really not sure how much my grandmother is worth, i know my parents are aroun 1-3MM, I stand to probably inherit at least $100k, I will treat it like a bonus, I want them to spend their money and enjoy life, they are in their mid/late 60s.

 

[Kings over Queens]

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..

How about a trust with income doled out to them slowly? A trustee will cost money, but with that comes the peace of mind that they won't get a big chunk of money to spend on woman and booze, and waste whatever is left.