Beneficiaries with Financial Problems

If you leave an inheritance to someone who has significant financial problems, the inheritance will be available to your beneficiary’s creditors. This may help the beneficiary get back on his or her feet. But if the beneficiary’s circumstances are bad enough, the inheritance may go to his or her creditors, without really benefiting your intended beneficiary.

What options do you have if you are concerned that a child or other person you wish to benefit on your death has financial problems?

Instead of leaving a share of your estate to the beneficiary as an outright gift in your will, you can have your lawyer draft your will to create a trust for the beneficiary. You appoint someone in your will, called a trustee, to hold and manage a share of your estate for the benefit of the beneficiary. In your will, you can give the trustee the power to decide if and when to make payments to the financially troubled beneficiary. This is called a discretionary trust. You will need a provision in your will saying who receives anything left in the trust on the death of the financially troubled beneficiary. You can also allow the trustee to make distributions during the financially troubled beneficiary’s lifetime to other beneficiaries, such as the financially troubled beneficiary’s spouse and children.

The advantage of using a discretionary trust for a financially troubled beneficiary is that funds can be available to assist the beneficiary, without the funds being available to the creditors. For example, your will could contain a provision allowing the trustee to buy a home for the beneficiary to live in. The trustee could register the home in his or her name in trust. Because the home is held in trust, and there are other beneficiaries of the trust, the creditors will not have the right to seize the home.

If is important that the will be drafted well to make sure that a discretionary trust is created. It is also a good idea to make the terms of the trust flexible enough to meet potential changes in circumstances. You might to give the trustee the flexibility to transfer the trust assets to the beneficiary. Then if the beneficiary is able to overcome his or her financially difficulties, the trustee can then transfer the assets, and wind up the trust.

You also need to choose the trustee carefully. The trustee will have responsibilities that could go on for many years. He or she should have the ability to manage funds or other assets, and be sensitive to the needs of the financially troubled beneficiary.

It is also important to consider your whole estate plan, and not just your will. For example, if you name the financially troubled beneficiary as the sole beneficiary of your Registered Retirement Savings Plans, life insurance policies, and put funds in joint accounts with right of survivorship with the financially troubled beneficiary, those assets will be available to the beneficiary’s creditors. There may be little point to having a carefully considered, professionally drawn will with a discretionary trust for the financially troubled beneficiary, if you leave most of your assets outright to that beneficiary outside of your estate.