Legacy Planning When Heirs are Imperfect

Passing your estate to an heir with credit problems, a shaky marriage, a gambling or alcohol addiction, or any other concerning situation might not only lead to that wealth being squandered, but the inheritance could worsen destructive behaviors.

Of course, you don’t want to disinherit your child(ren) simply because of their personal challenges. There are potential solutions that allow parents to control and incentivize behaviors long after they are gone, helping ensure that a troubled child’s inheritance won’t be misused.

You do not want to avoid or delay creating a plan hoping that your heir’s issue will go away. This could result in you passing before any plans have been set and the inheritance could be given without restrictions.

A trust is one idea to consider, since it can pass wealth to an heir while maintaining control over the how, when, where, and why the funds can be accessed.

When establishing such a trust, you can appoint a trustee, who is typically an independent, third party (e.g., trust company) or family member. Appointing a family member, however, may be fraught with problems. Hypothetically speaking, who do you think may be better able to resist the pleadings of a desperate beneficiary? A close relative or a corporate entity?

Furthermore, the trust can specify the precise circumstances under which money will be paid to its beneficiary, or it can specify that the trustee will retain complete discretion in the disbursement of funds.

Trusts can also include incentives, such as requiring drug or alcohol testing before the funds are paid out, or perhaps, that a lump-sum payment be made only upon graduation from college.

To ensure that an heir is committed to change, lump-sum amounts can be paid out after prescribed periods of time, (e.g., five years of sobriety). To encourage your heir to seek gainful employment, the trust might pay out a dollar for every dollar earned in wages. Alternatively, the trust can be written whereby payments are made directly to service providers, like a landlord or utility company.

Trusts can be flexible in their design, but before moving forward with a trust, consider working with a professional who is familiar with the complex rules, regulations, and tax implications.

If you would like an introduction to a legal professional who can assist with a trust, please let us know.

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on July 30, 2023 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.