SEPTEMBER 1, 2014 VOLUME 21 NUMBER 31
A reader asks: “could you do an article on how to leave inheritance to a son who is not good at handling money? Should I leave his portion to another son who is good at it? They are very close and would get along.”
First we have a disclaimer, then the answer, then an explanation.
We don’t know our reader’s life situation, or her son(s), well enough to give her actual legal advice. The answer we offer will be based on generalities, and might not apply to her very well. This is why one hires a lawyer — to get actual advice based on one’s real circumstances (oh, and for drafting of the documents — but that’s usually less important than the advice).
We do have some observations and suggestions to consider, but they are based on situations that we have seen before and our knowledge of law and human nature. They are offered not as an answer, but as an exploration of some of the alternatives our reader — and you, if you are in a similar situation — should think about.
What you probably need, dear reader, is a trust for the benefit of your son who is not very good at handling money. Whether your son who is good at handling money will serve as trustee or not should be a question that you discuss with your attorney. But if you meant to ask whether you should just disinherit your son who is not good with money and give a double portion to your other son (expecting him to take care of his brother) — the answer to that question is a clear and firm “no!”
(Special bonus section. It will help the explanation flow more smoothly.)
An arrangement where one person handles money for the benefit of another is called a trust. A trust can be formal, with lots of legalistic provisions and directions to the trustee, or very simple. You can simply hand a check to one person, saying “here, take care of this for your brother” and create a trust. But don’t — that’s a sure way to destroy familial relationships and transfer family wealth to lawyers. It is important to have an actual trust document.
A trust can be created in your will (in which case it is called a testamentary trust) or while you are still alive (in which case it is usually called a living trust, though some lawyers prefer the term inter vivos trust). The person who is entitled to receive benefits from the trust, whether right now or upon the death of the current recipient, is called a beneficiary.
A trust that prohibits the beneficiary from transferring his or her interest in the trust’s assets to another person is called a spendthrift trust. That doesn’t necessarily mean that the beneficiary is a spendthrift, though he or she may be.
The person who handles money for another is a trustee, and a trustee is a fiduciary. A fiduciary has an obligation to report the finances of the trust to the beneficiary (beneficiaries, actually — the people who receive benefits on the death of the current beneficiary may also be entitled to reports. But that’s a topic for another day).
If you create a testamentary trust (in your will, remember?), you have pretty much assured that your estate will need to go through the probate process in order to fund the trust. That’s not necessarily a bad thing, but it often comes as a surprise to clients. Avoiding probate while establishing a trust usually means a more expensive estate plan.
The question is deceptively simple, and the answers have a number of repercussions to consider. Can you simply disinherit a child who is not good with money? Yes, you can (at least in Arizona, and assuming the child is not a dependent or minor child). That might lead to hard feelings, and even litigation, but assuming you are competent and your wishes are clearly stated, the disinheritance should be effective.
At the same time, you can leave a disproportionate share of your estate to someone else. You can even tell them you expect them to take care of a sibling (or a grandchild, or a spouse, or anyone else you are disinheriting). But you can’t expect them to actually carry through. They may be saintly and responsible, but they are not immortal. Your son will probably leave his estate to his wife or children — and they might or might not carry through on his obligations. Or your son might have business reverses, or be sued by someone he injures accidentally, or … you can begin to see the variety of problems that could arise.
There’s a practical problem in addition to the legal/financial one. Your two sons get along well? We can tell you that cutting one out and telling the other to take care of his brother will end that positive relationship. The disinherited child will feel like he has to beg for something he is entitled to. The favored child will feel like he has been thrust into a parental relationship with his brother. Each will resent the other.
By creating a trust, you reduce that problem — but you do not eliminate it. The trustee son can now point to the document to explain his decision (“see? Mom said I was not to just turn the money over to you to buy as many cars as you thought you needed”), but there will still be a fundamental change in their relationship. You might want to consider making someone else trustee.
But who? The brother who already doesn’t get along with the beneficiary? (Don’t dismiss this idea so quickly — the question is asked half-humorously, but half-seriously.) The bank? Another family member (the cousin who is a bank officer, perhaps)? A professional (your accountant, your lawyer, your broker)? A professional fiduciary (they are set up in many, but not all, states)? Each of those choices has positives and negatives, and they are the topic for some future discussion here — and a more immediate one with the lawyer you hire to draft your trust.
Best of luck. It’s not easy to deal with your children’s different needs, abilities and expectations.