Planning an estate for an irresponsible child can require careful consideration to protect assets and ensure the child’s future well-being. One effective strategy is to set up a trust, which allows you to appoint a trustee to manage funds. Another option is designating a durable power of attorney to handle financial matters, which can provide an added layer of oversight. Additionally, life insurance policies can also be structured to provide ongoing financial assistance.
If you need help planning an estate for an irresponsible child, a financial advisor can recommend trusts with designated trustees and set up structured distributions to manage inheritance.
Use a Trust for Your Child
A trust can provide significant benefits when estate planning for an irresponsible child. It starts with the trustee, who oversees the funds to ensure they’re used for particular purposes, like education or healthcare. Moreover, a trust can safeguard against other risks, such as creditors or if the trust gets sued.
Consulting with an experienced estate planning advisor or attorney can help you establish a trust that complies with all the relevant laws, and avoids the dangers of DIY estate planning. These experts can guide you in picking different types of trusts, such as revocable or irrevocable trusts, and help you determine the best approach for your situation.
Stipend vs. Lump Sum Payments for Irresponsible Children
Stipend payments involve distributing funds in regular, smaller amounts monthly or annually. This method helps prevent impulsive spending and creates a steady flow of financial support. A consistent stipend can also help you manage the child’s access to funds and encourage healthy financial habits like budgeting.
Lump sum payments, on the other hand, can provide the entire inheritance at once, which gives the child complete control over a substantial amount of money. While this might seem straightforward, it can be risky if the child lacks financial discipline. A large sum can be quickly depleted through poor financial decisions, leaving the child without long-term support. Lump sum payments also expose the inheritance to potential risks such as creditors or legal judgments.
What to Do With Non-Monetary Assets
Managing non-monetary assets for an irresponsible child can require clear communication. Non-monetary assets include real estate, collectibles, or family heirlooms, and can provide long-term benefits if managed correctly.
Therefore, placing these assets in a trust managed by a trustee can protect them from mismanagement and get them distributed in a manner that aligns with your intentions.
For example, placing a family home in a trust can help maintain the property through a trustee who can make decisions about its use or sale, and thereby prevent an irresponsible child from squandering or mismanaging the asset.
Another example could be placing a valuable artwork in a trust. This would allow the trustee to handle its care, insurance and potential sale, thereby preserving the artwork’s value.
However, you should note that trusts also have drawbacks. One common drawback is the potential cost and complexity of setting up and managing the trust, which includes legal fees and trustee expenses. Another drawback could be the possible loss of direct control over the asset, as the trustee makes decisions based on the terms of the trust rather than the immediate preferences of the beneficiary.
Do You Need a No-Contest Provision?
A no-contest provision is a clause in a trust or will that penalizes beneficiaries who challenge the validity or terms of the document, typically by disinheriting them or reducing their share of the estate. You may want to include this provision to discourage disputes among beneficiaries, ensure that the trust is carried out as intended and reduce the likelihood of costly and time-consuming legal battles.
However, you should note that a no-contest provision may not always be enforceable in all jurisdictions, which could limit its effectiveness. Additionally, it could still alienate family members and escalate disputes if beneficiaries feel unfairly treated.
To set up a no-contest provision, you simply have to include a specific clause in your trust or will that clearly states the penalties for contesting the document. In order for this provision to be binding, make sure it is drafted by a legal professional to comply with state laws. And, if you change your mind, you can always revoke a no-contest provision by amending the trust or will through a legal process, which typically requires formal documentation in adherence to state laws.
Bottom Line
Planning an estate for an irresponsible child may require you to create a trust to protect, manage and distribute assets. Consulting with an experienced estate planning professional can help you tailor these strategies to your family’s specific needs.
Tips for Estate Planning
- A financial advisor can help you create a plan to manage and distribute your estate. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Estate planning can be complicated when you have to manage a large estate. To ensure you have everything you need, read up on the essential estate planning tools for wealthy investors.
Photo credit: ©iStock.com/Morsa Images, ©iStock.com/mediaphotos, ©iStock.com/Mr Vito