Most people are familiar with the proverb, “Give someone a fish, feed them for a day; teach them to fish, feed them for a lifetime.” That’s sound advice — as long as the person wants to learn how to fish. But if they’d rather trade their fishing gear in for a night on the town, then they obviously haven’t learned the lesson.
Similarly, fiscal responsibility is something you must learn, but not everyone wants to learn it. This can be problematic if you are making out a will and one of the people on your list is fiscally irresponsible. The fear is that they will blow the inheritance rather than put it to good use, such as toward living expenses, investments or retirement savings.
One option is to not leave them any inheritance, but that’s a hard call to make. Do you really want a loved one resenting your memory long after you’re gone?
There are other options, though. Here’s a look at four actions to take if you are leaving an inheritance to someone fiscally irresponsible:
Analyze the Role You Play
A good first step is figuring out whether you have contributed to their fiscal irresponsibility through your own actions, such as bailing them out whenever they get into financial trouble or paying their bills because they can’t afford to. InCharge Debt Solutions refers to this as “living in a false economy” that can sabotage financial responsibility.
Take the time while you are alive to have a talk with the fiscally irresponsible person to discuss steps they can take to become financially independent. This might involve cutting them off from your funds so they are forced to make changes.
Hire a Professional
Rather than giving the financially irresponsible person money to cover their own debts or expenses, spend the money on a professional financial advisor. The advisor can meet with the person to provide a game plan for developing better money habits.
Set up a Trust
Instead of leaving a straight inheritance, set up a trust in the person’s name. A trust gives you more control over how and when an inheritance is distributed to an heir by putting a trustee in charge of managing the assets, according to a blog from Czepiga Daly Pope & Perri LLC, a Connecticut-based law firm. The trustee could be a friend or relative, the attorney who drafted the trust, or a financial institution.
Trusts can be set up in different ways. Here are some of the options:
- Distribute the inheritance over time through annuities.
- Establish an incentive trustthat setsconditions the heir must meet in order to “earn” distributions.
- Set up an age-based trust that increases the distribution as the heir gets older.
- Establish an income-matching trust in which annual distributions are made in an amount matching the heir’s earned income or a percentage of that income.
Include a Spendthrift Provision
Another option is to incorporate a spendthrift provision in the trust that restricts a beneficiary’s interest in trust assets from being transferred. In this case, the trustee is directed by a spendthrift trust on how to disburse the beneficiary’s portion of the estate, according to the Trustworthy website. Among the possible limitations are paying only for a beneficiary’s essential living necessities or giving only restricted deposits directly to the beneficiary.
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