As you begin estate planning, you may want leave money for your children even though they may not have inherited your good financial sense. If there is a chance a child could squander his or her inheritance, it may be appropriate to take precautions to help protect your hard-earned money and save your child from himself or herself.
Some children should not inherit a large lump sum
Although you may want to leave your money to your children, a child who does not have good money management skills may spend the money wastefully. For some children, receiving a large lump sum could even cause more harm than good.
A child may not be prepared to make responsible financial decisions if he or she:
- Has accumulated significant debt
- Struggles with drug or alcohol addiction
- Has a gambling problem
- Faces bankruptcy
- Exhibits general impulsivity
A spendthrift trust can limit your child’s access to the money
Although it could be dangerous for some children to inherit a large lump sum, that does not necessarily mean you must disinherit them. A spendthrift trust offers one way to leave a child money, while ensuring the child will not waste the money.
With a spendthrift trust, you can choose someone who is financially savvy to serve as the trustee. This person will manage the money on behalf of your child and distribute it to him or her according to the provisions of the trust. Often, the provisions will allow the trustee to provide distributions at his or her discretion, but sometimes the provisions are more restrictive.
You can design the trust to last throughout your child’s lifetime or for a set number of years. Your child will not be able to blow all the money on something frivolous because he or she will receive his or her inheritance in small amounts over time. Also, the money in the trust can remain safe from creditor claims because your child does not have direct control of the money in the trust.
While some children can manage their finances wisely, other children cannot. When a child does not have the financial sense to use his or her inheritance wisely, it may be appropriate to consider a spendthrift trust or other estate planning tools designed to protect a beneficiary from himself or herself.