How to Protect Your Legacy From an Irresponsible Heir

A man's hand reaches for a very tall stack of cash.

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"Arthur" asked one of the most frequent questions I hear from readers about one of the biggest frustrations in estate planning:

"Is there some way to prevent a financially irresponsible child from squandering his inheritance and winding up on the street or from others trying to take those funds to satisfy debts?"

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Arthur, who is 85, described his oldest son, "Abel," as "a lifelong, irresponsible deadbeat who owes over $200,000 in past-due child and spousal support. His wages are being garnished, and anytime he puts money in a bank account, it is seized.

"All my assets would total close to a million dollars, and I want to leave everything to my four children equally. Abel wants me to have a family trust written with a 'spendthrift' clause that would completely protect his portion from all of his debts and judgments, including child and spousal support.

"I want to be sure he always has a roof over his head, but if this is true — as to support obligations — his total lack of morality makes me sick. His children did without because of their father being a flake, and my other kids hate him for his selfishness.

"A free family trust planning seminar is being put on next month by what I assume are lawyers who can create a trust for much less than a local estate planning attorney. What are your thoughts, Mr. Beaver? May we talk?"

Don't fall for this scam

When we talked, it was clear Arthur was tempted to attend this "free lunch seminar" that was in reality a traveling "trust mill" scam not conducted by attorneys.

Usually, these seminars are held in hotels and use high-pressure, fear-based tactics on older people to sell them life insurance and other financial products that aren't tailored to their individual needs. They also push completely useless, one-size-fits-no-one living trusts.

"Arthur," I said, "we all want to save money, but a seminar like this isn't the way to develop an estate plan that meets your specific goals. A lawyer whose practice is focused on estate planning is so valuable."

He agreed, and then I asked, "What memory do you want your other children and family to have of you — as being fair to everyone or favoring an irresponsible deadbeat?"

Fair does not mean equal

I noted that it's not written in stone that a parent must give their estate to the children equally. When an inheritance goes to a child whose siblings justifiably consider irresponsible, dishonest and manipulative or simply undeserving, that parent — from the grave — has uncorked a bottle of bitterness that's been aging for years.

"Do you want to be seen as a co-conspirator with someone you clearly have disdain for? I I suspect you've dug into your own pockets to help out his former wife and children. Arthur, tell me I am wrong."

"No, you're so right, Dennis," he haltingly replied, his voice choking with emotion.

What is a spendthrift clause, and how does it work?

My reader is correct that a spendthrift provision in a trust prevents the voluntary and involuntary transfer of a beneficiary's interest — making them unable to give their inheritance to anyone. Most creditors cannot take any of the trust funds.

So, this powerful clause in an estate plan is highly effective in protecting the beneficiary from themselves and others, helping:

To avoid the inheritance being lost to addiction, gambling and risk of squandering due to impaired cognitive abilities
To protect beneficiaries who are financially irresponsible, vulnerable to manipulation or facing legal claims
To preserve family wealth for future generations

Until the assets are distributed, Abel would not own them, and they would remain untouchable by his creditors. It would just take a paragraph in Arthur's estate plan directing that his share of the inheritance go into a trust managed by a trustee.

A trustee, as described by the courts, is a trusted individual or a professional fiduciary.

A trustee could be a family member, but that would be dangerous when we have a con, flake or manipulative sibling who could easily threaten violence unless they're given what they want.

Other uses for a spendthrift clause

Arthur has other options, too. For example, a parent could tack on to a trust certain requirements to meet before a beneficiary can receive a portion of the inheritance, such as:

Completing high school, college or vocational school
Remaining employed or actively looking for work
Verifiably keeping free of drug or alcohol abuse
Avoiding being convicted of crimes that call for actual time in custody

Particular to beneficiaries like Abel, the beneficiary can be required to:

Submit and follow a budget approved by the trustee
Pay down debts and not take on obligations he cannot meet given his income
Stay current on all support orders

A spendthrift clause is not bulletproof

While a spendthrift clause prevents most creditors from taking trust assets, certain government entities can bypass the protections, and some legal obligations can lead to assets being seized. Some examples:

Claims for unpaid taxes or fines imposed by government entities
Criminal fines and restitution in most states
Unpaid child and spousal support in most states

Also, it's worth noting that once the assets are distributed to the beneficiary, the protection of the spendthrift clause is lost.

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Most parents work hard for their families to put food on the table. I do not know any older adults who would knowingly help "an Abel" benefit from an inheritance when he stiffed their grandchildren's mother and the kids.

I am glad that Arthur reached out. It is time for him to retain an estate attorney.

Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column, You and the Law. Through his column, he offers readers in need of down-to-earth advice his help free of charge. "I know it sounds corny, but I just love to be able to use my education and experience to help, simply to help. When a reader contacts me, it is a gift."