What to Do About Children Who Can’t Handle Money

by Michael Ettinger, Esq.
It’s an estate planning epidemic. So many successful parents we meet have children who are poor or worse at handling money, have not achieved significant success in life where they have garnered enough experience in handling money or they simply refuse to grow up. What’s a parent to do?

Enter what has been termed the greatest invention of English common law: the trust. Trusts are legal entities that may hold and use assets for a beneficiary (your son or daughter) but have them managed by a trustee (one of more responsible adults, including a professional trustee).

Let’s say your son Richard is the problem child. Your estate plan using a living trust would provide that upon your death or, if you have a spouse, upon the second death, Richard’s share would go into the Richard (your last name) Trust with perhaps a family member and your attorney as co-trustees. The Richard Trust would continue for his lifetime, or until a stated age, perhaps sixty of sixty-five, when it would pay out to Richard. In the meantime, the trustees may use the money for Richard’s health, education, maintenance and support. The trust can help him start a business or buy a house or, alternatively, purchase a house for him. Alternatively, the trust may go on for his lifetime and then, upon his death, to his children (at a stated age).

The sprinkling trust is often used in this context as well. Let’s say Richard has two children and you are very concerned about them as well. You may set up a trust for Richard and his children and direct the trustee to “sprinkle” the income and principal amongst the beneficiaries, in equal or unequal amounts, whenever it is needed or will do the most good. So if one of Richard’s children is accepted to Harvard, while the other goes to the local community college, the trust may help both. An added bonus with these trusts is that they keep the assets out of the hands of Richard’s spouse who, in some cases, is a large part of the financial problem.

For children in dire financial straits or perhaps headed in that general direction, the effects of a potential bankruptcy on the inheritance and estate administration must be addressed. Noted New York bankruptcy lawyer, Jay Fleischman, Esq., has written about what happens if your son or daughter files for bankruptcy within six months of the date of your death. According to attorney Fleischman, “under the bankruptcy laws, people who receive the right to an inheritance within 180 days of the date on which they file for bankruptcy risk losing that money or property – even if they do not take actual legal title within that period of time. The right to receive that money or property is considered an asset of the bankruptcy that, depending on applicable bankruptcy exemptions (these vary from state to state), could be seized and distributed to creditors”.

Nevertheless, by leaving assets to your son or daughter in a trust, giving the trustee discretion to distribute income and principal as the trustee sees fit, you may protect those assets from being lost in a subsequent bankruptcy proceeding.

There is a lot to talk about in a consultation concerning setting up a trust for an adult child, such as the pros and cons of naming siblings, other relatives, friends and professionals as trustees. Other considerations are how long the trust should go on, what payments the trust should allow or disallow, and who the back-up trustees might be. All your choices have their pluses and minuses which need to be fleshed out so as to provide the plan that best suits your family’s needs.

Finally, one of the key features of our Lifetime Estate Planning Process, is the free review we provide every three years. This means that we will continue to monitor the estate plan so that if your son Richard turns things around and no longer needs the trust later on, an event we have experienced many times, the trust may be eliminated by the parent later on, before it is too late to undo it.

Contact Information