You worked hard for many years, saved well, and find yourself in a position to provide a legacy to loved ones after your death. The starting point for me is always the reminder that you have no obligation to provide an inheritance to anyone, even family (with a possible spousal exception), and therefore you can decide on an individual basis who gets what and whether there are any strings attached.
The simplest approach to leave a legacy to loved ones is to use your Will or Revocable Living Trust to name the individuals to whom you are providing an inheritance amount, either a percentage or specific dollar amount, with outright distribution to the beneficiary at your death and “no strings attached.” But simple is not always the best approach in more complex situations.
Sadly, it is not an uncommon situation to have concerns about providing an inheritance to family members who may have a poor track record of handling money, are in a troubled marriage, or have substance abuse or gambling issues. As planners we are often asked by our clients what they should do in these cases.
Let’s look at the case of Marge, a widow with no children of her own who wants to provide for her five nieces and nephews as well as some charities when she dies. Marge has a total estate of $1 million. Marge is thinking about a bequest of $100,000 each to her five nieces and nephews from the sale of her $500,000 home, with the remaining assets going to several charities. Marge is comfortable with three of her nieces and nephews getting their funds outright, but one niece is in a troubled marriage and one nephew has a history of substance abuse. Marge asks your advice on what she should do.
In coordination with Marge’s estate planning attorney, we looked at her options. The simplest option of outright distributions is not feasible for the one niece and nephew with issues. Marge could consider creating a trust in her Will or a Revocable Living Trust. Either trust can appoint a trustee to manage the inherited funds for the niece and nephew with whatever terms and conditions Marge would like. The trust option does satisfy Marge’s goal to provide for her family but not permit them to squander their inheritance. However, due to the cost of administering each trust, a trust may not be economically feasible for the $100,000 amount that Marge is considering for this legacy goal. Assuming it is feasible, who should she choose as her trustee? Marge is thinking that one of her nephews, a CPA, would be a good choice for that role, but a relative is not always the best idea. The trustee is put in a difficult position of being seen as standing between the beneficiary and his or her money. A professional trustee such as a bank, trust company, or financial/legal professional would be a good choice but may not be cost effective for this size legacy.
Another option for legacies too small to create a cost-effective trust is to include a provision in her Will or Trust to have her Executor/Personal Representative (likely her CPA nephew) use $200,000 from the proceeds of her home sale to purchase two $100,000 restricted single premium immediate annuities (SPIAs) for the benefit of her niece and nephew with issues. The restricted SPIA differs from other annuities in that the beneficiary has no ability to sell the annuity for cash or demand any payments beyond what the annuity provides. And, unlike a trust, there is no family member or other professional in charge of the funds in trust – just the annuity company making monthly, quarterly, or annual payments to the beneficiary. For the $100,000 legacy, it may not be feasible to have an annuity go on for longer than 10 years, but Marge is okay with that since neither her niece nor nephew can change anything, and they get the guaranteed payments under the terms of the annuity contract. What they do with the money once they get it is something Marge can’t control! But that is the same for trust distributions as well. Control can only go so far.
Your situation may not be similar to Marge’s, but it is important to understand that you have multiple options with providing a legacy – or not – and that your planning team can help you achieve your goals in often creative ways. The only plan that won’t work is the plan that is never put in place!
George F. Reilly, J.D., CFP®
Occoquan, VA