Estate planning is considered as a process which will ensure that the family will be financially and mentally protected after your demise. When it comes to parents, their wish is the best of everything for their children and that’s why they leave their assets for the children so that they live comfortably. Though parents treat all their children equally, however, while distributing your assets you need to understand that whether a child is a prudent saver or frugal spender so that you will be aware that which of your children is spendthrift and you can proceed accordingly.
To handle a greater asset, requires financial maturity in the person. It takes entire lifetime to understand the finance management skills be it complicated financial affairs or personal strength and weakness regarding earning, spending and saving. So if you have low or no confidence in the financial judgement and responsibility of your child towards the estate, then there are certain measures that help you protect your child from themselves (being spendthrift) and will also ensure that the wealth left by you truly makes your child’s life better. Although a last will ensure the disposition of your assets as per your desire, a trust proves to be way better in many cases under the spendthrift rule of many states.
Estate planning for an Irresponsible Child
1. A Lifetime Trust:
It is an estate planning tool that provides an income to your child throughout their life after your death. It is totally your decision to allow how often and what sum of money is to be paid to the child through the lifetime. Apart from this, the lifetime trust does have provision to provide financial emergencies if ever required by the children.
However, the most important aspect in a lifetime trust is the choice of the trustee who can be a friend or relative whom you can trust upon that he/she will look for the best interest of your child. However, these type of trustee are not practical as the child will be living more than the designated aforementioned people. Hence instead of naming a person as trustee, you can designate a financial organization as the trustee to ensure that there will always be someone to manage the account.
2. An Annuity:
Another option to leave wealth for a spendthrift child is to specify the trustee to purchase an annuity which will be paying a monthly income to the child after your demise. However, there is a catch. An annuity is unable to help your child in case of financial emergencies such as medical emergency and your child won’t be able to access a large amount of money.
3. Incentive Trust:
Also sometimes referred as “Pay for Performance” which means that the trust is instructed in such a way that there are conditions which the child must fulfill in order to earn the amount. Many parents link the distributions to the achievement of educational goals, while some links to personal life goals like career, marriage etc. However, you may create them the way you want to so that you will be assured that as your child will progress in life they will get the money accordingly.
4. Age-based Trust:
The most traditional way to take is to set distributions corresponding to the age of the child. But this method cannot control the spendthrift nature of your child as it’s been said that, ‘Age does not automatically equal wisdom.’
5. Income-matching Trust:
This type of method is preferred when your child is already an adult and has started working. In this case, the annual distributions can be attributed in such a way that it corresponds to an amount matching the child’s earned income or a percentage of that income, which will be add-on to the monthly salary of the child.
Another case is when the assets are not monetary such as your home or car etc. In such cases if the child is financially irresponsible then there are chances that they can sell the non-monetary assets to obtain money and thus your assurance to give your child a comfortable life might fade away. Hence, to avoid such situations, you can put such assets in the trust.
This will ensure you that either the asset has not been sold or if being sold then another similar asset (upgraded one) is being bought with that money. Also, you can assign some of your child’s inheritance so that they could be sold and the money obtained can be used in case of emergency like to pay off loan or mortgage. If the case becomes worst, then you can disinherit your child in your estate plan.
You can set the guidelines specifying which of your children are being disinherited from either a part or their entire share of your assets. However, your children might still be entitled to the exempt property, so you have to address this law too while making your will like specifically for what purpose or situation and in what way would the funds be distributed to the child.
However, there is no fixed solution that will suit all the scenarios when you are distributing your wealth to your children. You are the one who knows your children better in terms of their maturity and sense of responsibility, so at the end of the day, it will be totally up to you to make the decision for their betterment.