In our estate planning practice, we often have clients who are concerned about how their beneficiaries will use the assets which they will inherit. Sometimes the concern arises out of some personal problem of the beneficiary such as substance abuse; they don’t want the money to be spent on illicit drugs, gambling or other bad habit. Other times, the concern arises because the beneficiary is financially irresponsible or inexperienced in handling money. If the beneficiary gets it all at once, he or she may blow it all at once. Often the concern arises because of the people who are in the beneficiary’s life such as a boyfriend or girlfriend or even a spouse. The beneficiary may not be the problem—it may be who has his or her ear. Some beneficiaries may be easily swayed to use the money foolishly.
One way to protect against the mishandling of the inherited assets is to set up a Trust and hold the assets in the Trust with specific instructions on how and when they are to be distributed. If the assets are not distributed all at once, there is a greater chance they will not be mishandled.
An example may help illustrate the risk of an outright distribution of all of the assets at one time. Joe and Mary have two adult sons, Todd and Kenny. They set up Wills that left everything to Todd and Kenny outright at the parents’ deaths. When Joe and Mary died, they had $500,000 to be distributed. Once the probate estate settled, Todd and Kenny each got $240,000 (after the probate, which cost $20,000 to settle). Todd was a savvy investor and he managed his money well. After a year, Todd had spent only a fraction of his inheritance. However, during the same time period, Kenny had been a profligate spender and his girlfriend was no better. After a year, Kenny’s inheritance was almost gone and he had little to show for it. Kenny regrets that his parents didn’t set things up to better protect him.
Using this example, how could Joe and Mary have set their estate up to protect Kenny? They knew Kenny was not good with money yet they set him up to fail. A better approach would have been to establish a Revocable Trust (also called a Living Trust). This would have simplified settling the estate—saving the $20,000 spent to administer the probate. More importantly, they could have structured the distribution to Kenny so he did not get everything all at once. If Kenny received the distributions in increments, he might not have blown through his inheritance. Getting the money all at once was a bad idea. When received in increments, if Kenny spends the first increment unwisely, maybe he’ll learn his lesson before the next increment is distributed.
Here are some typical examples of structured distributions. These can be used singly or together.
The Trust could specify that the Trust assets would be distributed in percentage or fractional amounts over time. Example: The Trustee shall distribute 20% of the Trust estate upon the death of the Grantor of the Trust; thereafter, the Trustee shall distribute 10% of the then-remaining Trust estate every three years until the Trust corpus is completely distributed.
The Trust could specify that the Trust assets would be distributed periodically in specific dollar amounts. Example: The Trustee shall distribute $1,500 per month to the beneficiary until the Trust corpus is completely distributed.
The Trust could also specify that the Trust assets could be distributed for certain contingent purposes. Example: The Trustee may distribute as much of the Trust estate as the Trustee determines is necessary for the beneficiary’s health, education, maintenance and support. This is what is known as a HEMS provision. It gives the Trustee discretion to dip into the Trust assets to meet the beneficiary’s HEMS needs. Often the HEMS provision is used in conjunction with the incremental/periodic distributions.
An example combining these methods could be described as follows: Upon the Grantor’s death, the Trustee shall distribute 20% of the Trust estate to the beneficiary. Thereafter, the Trustee shall distribute $1,500 per month until the Trust estate is depleted. In the meantime, the Trustee may use as much of the Trust estate as the Trustee determines is necessary for the health, education, maintenance and support of the beneficiary.
Each of these distribution methods, when used by themselves or in combination, can protect the beneficiary from using the inheritance foolishly. The idea is to prevent the beneficiary from receiving the inheritance all at once—perhaps that way it will last a long time!
An experienced estate planning attorney can assist you in structuring a distribution plan that addresses your concerns for how your beneficiaries will receive your estate.