My children are irresponsible and cannot handle money. What can I do to insure they will not waste their inheritance?

Phillip G. Gubler and Thomas J. Bayles, Attorneys at Law

My children are irresponsible and cannot handle money.  What can I do to insure they will not waste their inheritance?

You worked hard all your life, lived frugally, saved money and invested wisely.  As you start the estate planning process, you may have concerns related to your children’s ability to manage money.  You may worry that providing your children with a cash distribution will encourage them to stop working hard; the very thing you did to gain your wealth.  You may worry your child, who has a drug or alcohol addiction, will use his inheritance to fuel his addiction.  Obviously, these are legitimate concerns and should be considered in estate planning.

If you are concerned how your child might handle a cash distribution, you could consider testing them by making some distributions now.  You can gift up to $14,000 (2015) per year to whomever you would like with no gift tax consequence.  If you are married, you and your spouse can give $28,000 per person.  You could consider gifting your children with no restrictions on how they use the money and watch what happens.  Will your child spend the money, apply it towards debt or invest?

You could skip the step where you test your children and make a gift by paying down a debt, such as mortgage principal or student loan.  This will provide some relief of financial obligations without putting the cash in their hands.  Since mortgages and student loans are significantly higher than when you were young, this can be a tremendous help to your children.  You should always make sure there are no negative consequences or pre-payment penalties.

The distribution portion of your Trust can be linked to age and life events.  For instance, you can create your trust so your children receive a distribution when they reach certain ages, such as 35, 40, or 45.  You could direct the distribution to pay for college tuition, down payment on a home, or other major life events.  You can also construct your Trust to allow distribution when your child reaches a certain point in his sobriety, such as anniversary events at 5, 10 and 15 years.   

It is reasonable to worry how an inheritance will affect your children.  With  proper planning, you can put some of your concerns to rest.