The Challenge of Estate Planning for Troubled Heirs

Providing for troubled heirs can be a challenging part of writing an estate plan.  The term “trust fund baby” usually evokes the images of Paris Hilton or Kim Kardashian or some other party-loving rich kids whose money gets them in trouble.  But the challenge of troubled heirs is not limited to those who are wealthy.  I've helped many middle-class parents plan for the well-being of heirs  -- often very well-mannered and intelligent -- who are struggling with difficulties in their lives.

Typically my clients make prudent saving and investment choices for their retirement.  Married couples want to be sure that they can maintain a comfortable lifestyle through both of their retirement years.  They want to be sure they never outlive their money. When they are gone they usually want whatever is left to be distributed to their children with the least delay or expense.

Few parents have any desire to rule from the grave. But sometimes restrictions on our adult children's inheritances are not only advisable but necessary. There are situations in which handing substantial sums of unrestricted money to those experiencing difficulties can make bad situations worse. Consider the adult child suffering from alcoholism or substance abuse issues or other self-destructive behavior. Or the one who's made a bad marriage to someone you simply don't trust. What about a child who has difficulty managing their money and has a history of making poor or irresponsible financial choices?  Sometimes our children are vulnerable to influences of others who don't act in their best interest.

There are a number of reasonable approaches we can take in to build in protections for these situations.

Restrict Access

The first approach is restricting access to the inheritance. Rather than providing an immediate outright lump sum distribution, your heir’s share of your estate is kept in a type of trust called a spendthrift trust where it is watched over by a successor trustee.  This is someone – possibly an independent or professional third-party trustee -- whom you trust who you know will act in your heir's best interest.

When is the money distributed? That depends. We can be as creative as the situation demands.

If we have complete confidence in our successor trustee we can simply leave it to his or her discretion. They can distribute sums of money at the times and in the amounts that they believe are appropriate to the circumstances. This puts a lot of responsibility on the shoulders of the successor trustee. This is probably not a good role for a sibling of the troubled heir. It can become extraordinarily burdensome to become, in effect, their brothers’ (or sisters’) keeper.

Using a spendthrift trust, we can provide a fixed schedule of distributions to the heir. Often my clients will provide that one third of one's inheritance is distributed at death, one half of the balance in five years, and all of the balance in 10 years. As the heir gets older he or she presumably becomes more mature and less likely to misuse their inheritance.  If they squandered the first distribution they still have two more chances to become more prudent.

Create Incentives

Some clients like to create incentives using their spendthrift trust. Sometimes the distribution of an inheritance is dependent on the troubled heir completing college. In the case of addictions distributions can only be awarded upon the heir being clean and sober for a period of time from one to five years. To encourage gainful employment, distributions can come in the form of matching dollar for dollar money that the heir earns pursuing a profession.

Use the Trust to Talk to Them

Finally, sometimes my clients use language in their trust to talk directly to a troubled heir and spell out their expectations. Such language is sometimes referred to as an ethical will. This is an opportunity to go beyond money and to talk about the importance of your values and your hope and expectation that the heir adopt similar values.

In Hamlet Act I Scene 3 Polonius imparts his values to his son Laertes who is leaving on a long journey.  As it turns out (spoiler alert) these are his last words to his son as Hamlet kills Polonius later in the play.  You’ve likely heard these words before.

Give every man thy ear but few thy voice.

Take each man’s censure but reserve thy judgment.

Costly thy habit as thy purse can buy,

But not expressed in fancy—rich, not gaudy,

For the apparel oft proclaims the man,

And they in France of the best rank and station

Are of a most select and generous chief in that.

Neither a borrower nor a lender be,

For loan oft loses both itself and friend,

And borrowing dulls the edge of husbandry.

This above all: to thine own self be true,

And it must follow, as the night the day,

Thou canst not then be false to any man.

Farewell. My blessing season this in thee.

I've always considered myself as much a counselor as an attorney. Helping families craft effective estate planning provisions for troubled heirs has been a very satisfying part of this work.

If you live in Michigan and need experienced estate planning help, contact Michael Einheuser for a free consultation. Michael helps families in Bingham FarmsTroyFarmington HillsRochester HillsSouthfieldWest Bloomfield TownshipBloomfield Township, and the surrounding Michigan areas.

Schedule your Free Consultation today: (248) 398-4665.

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