Leaving money to someone who can't handle it

Yes, we love our children. And if we're blessed with a legacy to leave behind, we all want our children to enjoy it.

But some of our adult children are more mature with handling money than others. Many families have adult children who have issues that preclude leaving them any significant assets in a lump sum.

For example, you may not want to leave a lump sum to children with the following issues:

• Spending or shopping addictions

• Alcoholism

• Drug addiction

• Spendthrift or untrustworthy spouses

• A history of ill-advised financial risk-taking

• Creditors that would come after your child if he or she ever owned any significant assets directly.

• Special needs that require assistance via Medicaid or other need-based social service benefits, if inheriting money would disqualify them from receiving benefits until they spent all their inherited money.

• The child is a minor or legally incompetent.

If any of the above situations apply, you should consider meeting with an attorney who is experienced in the areas of family law, estate planning and special needs planning.

What is a trust?

A trust is a legal entity designed to hold and distribute money for a beneficiary, or group of beneficiaries. When you die, with proper planning, your child will not inherit your wealth directly. Instead, the assets would come under the ownership of the trust. And when you set up the trust, you can determine the circumstances and criteria by which the trust will release money to the beneficiary.

Of course, after your death, you won't be around to do it directly. But you can write the instructions into the language of the trust, and leave it up to an executor to follow those instructions on your behalf.

For example, you can write language into the trust to accomplish the following:

• Convert assets into a stream of income, to be paid out only over the life expectancy of the beneficiary, or for a specific number of years.

• Release funds based on a series of milestones, such as graduation from high school or GED, graduation from an accredited drug or alcohol rehabilitation program, marriage or upon reaching certain ages.

• Release only an amount of income each month that will not disqualify your child from receiving Medicaid or other government benefits. State laws vary on what this amount is, but it is generally around $1,700 per month or less.

• Release funds contingent upon the beneficiary continuing to pass drug and alcohol tests or staying out of trouble with the law.

To make these conditional trusts effective, keep in mind the following principles:

Be realistic. Make sure the goals are attainable for your children. The perfect may be the enemy of the good. Your children are not perfect people, just as you aren't. Design your incentives and conditions thinking of the heirs you actually have, not the heirs you wish they were.

Set reasonable milestones. For someone with a lifetime of addiction, a month of sobriety is a major achievement - and a five-year goal with no midpoints may seem like too much even to strive for someone early in recovery. Set some reasonable early and mid-point objectives to help them along their path.

Be specific. Make benchmarks crystal clear, so there is no room for argument with the executor. Either the drug test came back clean or it didn't. Either the college student graduated with a bachelor's degree or got a GED or he didn't. Gray areas are nothing but trouble.

Build in an emergency plan. You may want to give your executor some flexibility in the event of an emergency, such as an unexpected disability, illness, injury, or other event beyond your beneficiary's control. Build in an escape hatch to allow for the unexpected in life.

Penny wise, pound foolish. Often we tend to go to the web for legal forms. It is important you consider meeting with a live attorney who is experienced in the areas of family law, estate planning and special needs planning. We would be happy to recommend someone in the legal profession experienced in your specific circumstances.

Structuring your legacy is one of the most important pieces of the retirement process, and many times it is overlooked. A SafeHarbor strives to help our family of clients to have an estate plan/legacy plan in place. We strive to add real value to our clients and we fully realize that relationships are built over time, not transactions. Call A SafeHarbor today for your complimentary copy of “Understanding Trusts – A Look at Living Trusts and Other Trusts.”

Bob Adams is president of A SafeHarbor, a firm specializing in assisting families in having a calm retirement when faced with stormy financial waters. Visit aSafeHarbor.com or call 407-644-6646 for more information.