leaving money

The Emotional Challenges of Leaving Money to a Spendthrift Heir

One of our societal money scripts around estate planning is that good parents leave everything to their kids, dividing it equally.

But what happens if parents are concerned about a child squandering their inheritance? Sometimes parents will put limitations or strings on how the money is to be used. This is often referred to as controlling beyond the grave. There are many different ways to do this. It’s not necessarily bad, but leaving an inheritance with strings attached can have unintended consequences.

Leaving money without any strings is letting go of control. I’ve had clients say, “When I’m dead, I won’t really care. It’s up to them to use the inheritance responsibly.” The question to ask is, are you really clean in that decision? Is it letting go of control, or is it doing what is simplest but still having a gnawing fear, resentment, or unease around the decision?

This can be a complex issue. Some people may have specific values they want to see accomplished with the legacy: perhaps around education, home ownership, or financial security. In other families, there is a real concern that one child with a history of poor money choices will blow the inheritance and end up with nothing. There are a lot of examples where an inheritance has hurt the child, leaving them in worse shape both emotionally and financially.

So this is a big decision that is really difficult emotionally for parents. Most parents don’t want to disinherit a child. The idea of leaving one child nothing usually brings up a lot of guilt. When that is done, there’s often a lot of anger and hurt behind it. The disinheritance is often a secret until the last parent dies; it’s a kind of final punishment. This approach can be emotionally unhealthy. It’s also understandable and logical in light of the previous relationship and the history the parents and the child have around money.

If parents are fearful, with good reason, that a child will waste their inheritance, yet they don’t want to disinherit the child, what can they do? How can you structure an inheritance that to some degree protects a spendthrift heir against themselves?

A typical approach is to leave the money in the form of a spendthrift trust. The beneficiary doesn’t have any control over the money, which is managed by a trustee according to rules established by the parents. Commonly the beneficiary would receive a certain percentage every year, or the trust would pay for specific expenses such as education.

There are downsides of leaving money in trust. The decision-making around the provisions of a trust can be complicated. The costs to set up and manage trusts make them inadvisable for smaller inheritances; in that case, another possible solution is a single premium immediate annuity. The beneficiary may resent having limitations on their inheritance when others receive theirs outright, which can result in a legacy of conflict and hard feelings among siblings.

Another complicating factor is how to provide for the children of a spendthrift heir. A trust can be structured so there is a good chance that something will be left for the grandkids. Leaving money outright to the grandchildren instead of their parent is also an option. Again, the biggest challenges around these choices are the difficult emotions and the dynamics of the relationships.

Since the options around this issue are complicated and can be technical, it’s definitely a good idea to work with professionals like a fiduciary financial planner and estate planning attorney. Because financial therapy is not just about the money, but aspects of it are about the money. The exterior financial part and the interior therapy part are equally important.

Whatever estate planning decisions you might make regarding a spendthrift heir, it is valuable to let them know what the provisions are. Emphasize that your intention is not to punish, but to empower and protect. The heir may or may not receive the information well, but there is probably a better chance of acceptance and understanding than if they are caught by surprise after your death. It may be helpful to have such a discussion with the help of a financial therapist, who can help you communicate both the financial concerns and the love that are part of the legacy.

Check out The Financial Therapy Podcast by Rick Kahler concerning this topic.

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