I was reading the January/February 2011 issue of Money Magazine when I came across the “Readers to the Rescue Section.” This particular issue’s question was “Is it okay to stipulate in a will how inherited funds may be spend?” First, thing is first, someone’s will is based on the eventual decedent’s testamentary intent, and if you don’t like the restrictions then you can disclaim or renounce the bequest. Notwithstanding how irrelevant a future beneficiaries opinion is, I think the majority of the people answered the question incorrectly meaning they didn’t understand the question.
My two favorite responses which were on the opposite ends of the spectrum were,
- No. A will is an instrument to give to those still here after you pass. A gift with stipulations isn’t much of a gift.
- Yes, you can make any restrictive stipulations you desire in a will. If the beneficiaries don’t like it, they can demonstrate their dislike by declining the bequest.
I think Money Magazine was really asking whether the reader supports the use of trusts in estate planning, and in most cases, testamentary (i.e. a trust created at death) should be used.
A Testamentary Trust Can Protect Beneficiaries
Every time I sit down with a client and start talking about their will or estate plan this topic comes up because they know their expected beneficiary. Money is a tool and when used the right way generations of your family can thrive, however, it is just as easy to ruin a life or lives. Do you have any idea what 21 year old Evan would have done had he inherited any amount of money? I can almost say with certainty that my life would be worse if I had.
When used properly a testamentary trust can protect your family in many ways.
A spendthrift is,
A person who by excessive drinking, gaming, idleness or debauchery of any kind, shall so spend, waste, or lessen his estate as to expose himself or his family to want or suffering, or expose the town to charge or expense, for support of himself or family.
I will tell you right up front that 21 year old Evan was a spendthrift hitting almost each one of those activities/vices. But so are most 21 year olds and that is why almost every testamentary trust has an age which assets are protected until.
For example many wills read that at X age the beneficiary gets 33%, at Y age the beneficiary gets 50% and at Z age they receive the remainder (Z will often be the age at which the parent assumes that the child will have reached majority – sometimes a poorly chosen age OR one that seemed so far away when the will was written).
Protection from a Divorce
Regardless of what statistic you want to put faith in, a lot of people get divorced and depending on the State you live in inheritance may or may not be considered separate property and thus subject to equitable distribution (i.e. splitting up the assets) at the time of divorce. Even in those cases where inheritance is deemed separate property it can undergo “transmutation” and turn into marital property when it is commingled with marital assets.
Do you want your assets to go to now your ex-son in law or daughter in law? I don’t care how much you love them the answer is invariably no. A testamentary trust may prevent that from happening.
Protection for a Bankruptcy
Even if your heir is not a spendthrift and they have a 30 year marriage ahead of them could they make a business misstep? Of course they can. Assets held in a properly drafted, funded and operated testamentary trust are likely not to be included as part of the bankruptcy estate for creditor repayment purposes. If the trust forces income to beneficiary that might be attacked by the Bankruptcy Court, but the corpus/principal will be left in tact.
Money Can do Good Things Money Can do Bad
As I get older I notice that all those things my parents did to protect me were actually very good calls despite how much I fought them about it when I was younger, and if you are lucky enough to be named as a beneficiary with restrictions such as a testamentary trust then there probably is a good reason such as one of the ones I named above.
There is a reason why you hear about trust fund babies…because they have money still because a fiduciary protected the principal from invasion by an idiot 21 year old.
What do you think…should trusts be built into most Last Will and Testaments?