What to do about an irresponsible heir

Summary

• Setting up a spendthrift trust limits how much and when your heir receives money—protecting both the inheritance and the beneficiary from poor financial decisions.
• After-tax annuities offer a simpler, lower-cost alternative that provides steady monthly income instead of a single lump sum.
• Starting the conversation with your advisor helps identify which strategy fits your estate size and family needs.

The inheritance issue

The prodigal son. The irresponsible heir. Every family’s got one. You love them, but you worry about them and fear what might happen should you ever leave them a pile of cash. They’re more likely to blow an inheritance on some cockamamie real estate scheme or a boozy trip to Vegas than ask a wealth advisor to suggest a well-managed mutual fund.

The good news is that estate planners have solutions. The most common: a spendthrift trust. As the name implies, spendthrift trusts limit or regulate the beneficiary’s access to assets. They are especially well-suited to those with large or complex estates. For more modest estates, annuities can regularly dispense money in a way that avoids handing over a lump sum to someone who may not spend it wisely.

Each option has advantages and disadvantages. The first step is discussing the irresponsible-heir situation with your wealth advisor. “It’s a sensitive subject, and clients are often hesitant to bring it up,” says Theresa Malmstrom, a TIAA wealth planning strategist. “But they’re usually relieved when they do. They find out they’re not the only families taking necessary steps.”

A trust to encourage healthy spending

Spendthrift trusts are designed to provide financial support while limiting an heir’s control over the assets. The beneficiary does receive the assets, but how much and when is governed by the terms of the trust and by the trustee appointed to oversee it. The beneficiary doesn’t own the assets—the trust does—and that can help shield assets from creditors should the heir be sued or chased by debt collectors.

Here’s how it works. Say you want to leave your 50-year-old adult son, Tom, a $500,000 inheritance, but you worry about his gambling problem. You and your attorney can structure a spendthrift trust so Tom will get monthly income from the trust—maybe $2,500 a month—along with oversight from a trustee who can ensure the money is being used appropriately. (If you don’t have a trust-and-estate lawyer, your TIAA wealth advisor can connect you with one.) You can grant the trustee power to distribute principal as well, in case of extenuating circumstances such as a large medical bill.

Depending on your family situation, it’s probably best if the trustee is independent rather than another family member. If Tom’s sister, Nia, were the trustee, it could strain their relationship. And whereas Nia might be swayed by Tom’s “c’mon, just this once” plea for extra cash, a corporate trust officer working for a trust company won’t, assuming the terms of the trust don’t allow it. Most trust companies, including TIAA Trust, feature independent trustees as part of their services. Visit TIAA’s estate settlement home page to learn more about our services.

The downside of spendthrift trusts is cost. The legal fees associated with setting up a trust can range from $750 to $2,000 depending upon complexity, according to Malmstrom. Spendthrift trusts require preparing separate tax returns, too, which is another expense. On top of that, there are annual maintenance fees and asset management fees. TIAA Trust, for instance, has an all-inclusive fee structure (covering both trust and asset management services) that’s less than what many competitors charge but still costly for relatively small accounts. TIAA Trust’s annual fees range from 0.5% to 1% of assets depending upon the size of the trust, with a minimum of $9,000 a year.¹ For a trust with $100,000 in assets, the $9,000 minimum would erode principal fast.

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