Q: What steps can be put into place to ensure an adult child, who makes poor decisions, will be secure after the death of the parent? The main asset is life insurance.
A: I hear this a lot and, in most cases, they aren’t a bad child. They just make bad decisions or lack self-control. Fortunately, there are several things that can be done to protect a child from themselves. It just takes a little planning.
What needs to be done is to provide for the child’s well-being but keep the actual money out of their hands. The answer of course is a trust. By leaving money to a trust, you put a responsible party in charge of the dough (i.e. the trustee) and prevent the spendthrift child from having control over the money.
Sometimes when I talk about trusts, people get nervous because trusts are expensive to create. Well not necessarily. You can create the trust for the benefit of your child in your will. It’s going to make your will a little longer but you don’t have to go through the expense of creating a stand-alone document.
A trust created in a will is known as a testamentary trust. Instead of leaving the money to your son, John Doe, you leave the money to the Jane Doe Testamentary Trust for the benefit of John Doe or something to that effect.
You simply set out the terms of the trust in the appropriate article in the will and, just like a stand-alone trust, you can be creative with the terms. For example, you can distribute the money over a series of years such as a third at the time of funding, a third three years later and the balance three years after that. That gives him three opportunities to get it right. You could also distribute the funds monthly or quarterly so that he has a source of steady income.
You could set it up to reward him for doing things right, such as a distribution so long as he is gainfully employed. This type of trust is known as an incentive trust or otherwise known as the carrot approach.
On the other hand, you could instruct distributions be withheld if he is doing something you don’t like such as abusing drugs or alcohol or gambling. This is affectionately known as the stick approach.
Since you know the beneficiary, be creative. Trusts don’t tend to be “one size fits all.” Think about what you want and talk to your attorney. If you don’t know what you want, talk to the attorney and get some ideas. A good estate planning attorney will be able to supply some options.
Finally, you mentioned that most of the funding for the trust will come from life insurance. You may be able to name the testamentary trust that you establish in your will as beneficiary of the life insurance and avoid probate altogether. I’d check with the insurance company to see if naming the testamentary trust is an option (not all of them will allow you to do this). If they will, there are still a couple of legal hoops to jump through but it may be a good way to limit costs and avoid probate. Just sayin'.
Christopher W. Yugo is an attorney in Crown Point. Chris’ Estate Planning Article appears online every Sunday at www.nwi.com. Address questions to Chris in care of The Times, 601 W. 45th Ave., Munster, IN 46321 or to Chrisyugolaw@gmail.com. Chris’ information is meant to be general in nature. Specific legal, tax, or insurance questions should be referred to your attorney, accountant, or estate-planning specialist.
The business news you need
With a weekly newsletter looking back at local history.