How to Handle an Inheritance Intended for a Problematic Beneficiary
Creating a successful estate plan requires you to make numerous important decisions. While many of those decisions are directly related to who you want to receive your estate assets after you are gone, other decisions will revolve around how to pass down those assets. Simply gifting assets directly to a beneficiary is not always the best choice, especially when dealing with a problematic beneficiary. Whether the beneficiary struggles with addiction, suffers from a mental illness, or simple cannot manage money well, it is important to consider your beneficiary’s ability to handle an inheritance when deciding how to pass down that inheritance. With that in mind, an Indianapolis attorney at Frank & Kraft discusses how to handle an inheritance intended for a problematic beneficiary.
Why Is a Problematic Beneficiary a Problem?
When it comes time to create or update an estate plan, most of us know who we want to inherit from our estates. It may even be relatively easy for you to decide which assets you want to give to which beneficiaries and/or what percentage of your estate you want to leave to each beneficiary. If all beneficiaries are adults, U.S. citizens, and capable of responsibly managing the inheritance you leave them, your estate plan should be relatively uncomplicated. Many people, however, have at least one “problematic” beneficiary. For example, an adult child who has struggled with a drug, alcohol, or gambling addiction for many years or an adult sibling who suffers from a potentially debilitating mental illness. Sometimes the problem is as simple as a spendthrift beneficiary – that one family member who cannot seem to manage money or make responsible financial decisions. Regardless of the reason, this is a beneficiary who, if handed a significant lump sum of money, would likely blow an entire inheritance in a short period of time with nothing to show for it. Because you don’t want to essentially throw your hard-earned money away, a problematic beneficiary is a problem that must be addressed when you create your estate plan.
Why Your Will Is Not the Best Choice
Although many people choose to use more than just a Will in their estate plan, your Last Will and Testament is capable of distributing your entire estate after you are gone. Passing down an inheritance to a problematic beneficiary in your Will, however, is not usually wise. Gifts made using your Will are typically distributed to the named beneficiary as a lump sum or by a single legal transfer of ownership without any strings attached, meaning there is no oversight and no control over what happens to the inheritance after it is passed down.
Options for Passing Down an Inheritance to a Problematic Beneficiary
To ensure that the inheritance you leave to the beneficiary is not squandered, and to provide the maximum benefit to the intended beneficiary, an inheritance earmarked for a problematic beneficiary is usually best handled using a trust. As the Settlor of the trust, you appoint a Trustee to oversee the administration of the trust and manage the trust assets in your absence. In addition, you can use the trust terms to arrange for staggered distributions from the trust instead of handing the problematic beneficiary a lump sum of money. Finally, you can use those same trust terms to provide incentives to the beneficiary to use the inheritance wisely. You might include a term, for instance, that encourages the beneficiary to complete a rehabilitation program, take prescribed medications, or learn to save money.
Do You Need Help Deciding How to Handle the Inheritance of a Problematic Beneficiary?
For more information, please join us for an upcoming FREE seminar. If you need help deciding what to do with an inheritance earmarked for a problematic beneficiary, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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