Most people understand the importance of keeping their inheritances separate – In fact, 75% of HelloPrenup users have an inheritance, and 90% of those keep it that way. This separation offers a degree of protection, but it’s not foolproof. What happens when the person inheriting the money struggles with spending and tends to spend a bit more carelessly than the average person (a.k.a. a “spendthrift”)? That’s where the real work of protecting an inheritance begins and making sure any spendthrift beneficiaries are prevented from aimlessly blowing through a testator’s hard-earned money. Let’s explore the strategies to protect your estate from spendthrifts.
The issue with spendthrift beneficiaries
First and foremost, let’s talk about why a spendthrift beneficiary can be problematic. The concern with a spendthrift beneficiary is that the inheritance likely intended to provide security or opportunity, may be quickly depleted on things the benefactor (you) would never support. For example, let’s say John has an estate worth $500,000. He wants to devise his assets to equally to his three children. This means each child would get about $166k. He is worried that his son, Tom, will needlessly spend this money on things like partying, clothes, and vacations when, instead, it should be used (in John’s opinion) to further Tom’s education or create a retirement fund. John is seeking control over this since when Tom receives the funds, John will be gone.
Strategies for protecting your estate from spendthrifts
Now, let’s get into the nitty-gritty: how *do* you actually protect an inheritance from a spendthrift? There are several strategies you can use, and it’s often a good idea to combine them.
Trusts
Think of a trust as a document that you can create that lays out conditions for your beneficiary to use your money. Instead of handing over a lump sum to your beneficiary, the trust, managed by a trustee (that you appoint), controls how and when the beneficiary receives the money.
Spendthrift trusts are a thing, and they are actually specifically designed to protect the assets from the beneficiary’s creditors and impulsive spending. They typically lay out conditions for the trustee to follow to make sure the beneficiary is spending the money appropriately. For example, let’s say Mary wants to give her $500,000 estate to her son, Billy, but she wants to make sure it doesn’t get eaten up by his creditors or spent aimlessly. So, she creates a spendthrift provision that says when and how he will receive the money on a limited schedule. She decides he should only get $1,000 per month. This incremental release of funds helps tamper with the ability for aimless spending and will hopefully encourage the funds to be used for Billy’s retirement or education.
Gifting during lifetime
Gifting smaller amounts to the beneficiary while you’re still alive lets you see how they handle money. It’s kind of like a test drive for you. See how they handle the money. It’s a great opportunity for some financial education, too. You can gift strategically – maybe give a little now, more later, if they prove responsible. You can also gift directly to service providers – for example, paying for their education or housing directly instead of giving them cash. Just remember that gifting can have tax implications, so it’s worth chatting with a tax advisor.
Directing funds for specific purposes
This is like earmarking funds for a specific goal, like education. You can set up accounts or funds for your spendthrift beneficiary specifically to pay for education, housing, or healthcare. This way, you know the money will be used for its intended purpose, even if the beneficiary isn’t the best at budgeting. It takes the temptation out of the equation.
Disinheritance as a last resort
Disinheritance is a tough one, but it is an option. It can cause a lot of family drama, and it’s also important to understand the legal considerations and best practices when considering this route. It’s definitely something you should discuss with an estate planning attorney, as the laws vary by state regarding disinheritance for certain beneficiaries, like spouses. It’s a last resort, but sometimes it’s necessary to protect your legacy.
Choosing the right strategy
Deciding what is best for you is going to be unique to your situation and your spendthrift beneficiary. For example, it might make total sense for one person to disinherit an estranged son who is a spendthrift, whereas that would never be an option for some families.
Here are some factors to keep in mind:
- The age and maturity of your spendthrift beneficiary.
- The size of the inheritance.
- The severity of the spendthrift’s spending habits.
- The desired level of control.
- The desire to avoid family drama and conflict.
The bottom line
At the end of the day, you’ll need to speak with an estate planning attorney to determine the best option for you. It might be creating a spendthrift trust provision, or it might be gifting while you’re still alive as a test run. Or maybe it’s something completely different. Whatever the case may be, you have options if you know one of your beneficiaries is known for spending money carelessly. Estate planning is meant to accomplish your goals, so you can rest assured that your wishes will be met even after you pass and your loved ones are taken care of.
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: Nicole@Helloprenup.com
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