Protecting beneficiaries from themselves
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When preparing your will you may have to consider if your beneficiary is fit to deal with an inheritance or whether it will simply be frittered away. Rod Cunich of Slater & Gordon explains the safeguards you can take to minimise the risk.
Every family has its cross to bear. Whether it’s a child who has an alcohol, drug or gambling addiction, is a spendthrift, makes poor financial decisions, or is manipulated by a spouse, the outcome is the same; emotional and financial stress which plagues the family from one generation to the next. I’m often asked, “What will happen to my money in the hands of my wayward child when I pass?”
Parents come to me with concerns that a family member is likely to squander an inheritance, saying “I’ve decided to cut them out entirely as an inheritance will only make things worse.” It is tempting to agree on occasions; some situations are truly appalling. I practise my deep breathing and suggest that there may be options which fall between the two extremes of leaving money with no strings attached and leaving nothing.
If you are concerned that any inheritance you leave your offspring might be wasted away, here are a few ideas to consider:
1. Put strings on the money
If you doubt your child will make sound decisions about spending their inheritance you can put those decisions in the hands of someone else. In your will you can leave the money in a trust and appoint a competent and caring person to manage the funds for the benefit of your child. They get the benefit of using assets in the trust and perhaps enjoying an income stream, but they never get to spend or waste the capital.
2. Installments, not a lump sum
If you are hopeful that maturity will cure them of their ailment, you can prepare a will that staggers the payment of the inheritance to a child – for example, one-third at age 25, one-third at age 35, and the balance at age 40.
Alternatively, installment payments could be paid annually. Along similar lines, you could establish an annuity which is a contract with an insurance company that obligates the company to make payments to a beneficiary. Annuities are often used to provide retirement income, but you can direct payments to a child as well. You can arrange for regular payments of a set amount for a certain period of time, or variable payments that depend on investment of the underlying premium.
3. Establish incentives
Incentive trusts are designed to reward behavior you want and discourage that which you consider destructive. You can concentrate on the good behavior and arrange for payments to be conditional upon the child achieving specific goals, for example, obtaining a job or completing an alcohol rehab program or staying free from drugs. This type of arrangement has its complications because the trustee has to exercise judgment and would need you to set clear guidelines.
Leading Australian law firm Slater & Gordon has specialist estate planning lawyers who can provide you more information on ways to protect your inheritance. Call 1800 555 777 to get in touch with your local estate planning specialist or click here for more information.
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