Trust fund may help if child can’t manage money

It’s very hard to find something we all agree on; however, if there was one thing we could agree upon it would be that it is not easy being a parent. Let’s face it, there is no “parent manual”; we basically fly by the seat of our pants and do what we think is best for our children. So, what do you do if you are concerned about leaving an inheritance to your son who is not good at handling money? Should you leave his portion to his sister who is good at it? After all, they get along fine.

First, please understand that each situation is different and one size does not fit all when it comes to family circumstances. I will offer some general tips, however, the proper solution for one particular family may not work for another family. Each person and family has their own personalities.

What you probably need is a trust for the benefit of your son who is not very good at handling money. Whether your daughter who is good at handling money will serve as trustee or not should be a question that you discuss with your attorney. If you are thinking about whether you should just disinherit your son who is not good with money and give a double portion to your daughter (expecting her to take care of her brother), I can assure you that the answer to that question is a clear and firm “no!”

An arrangement where one person handles money for the benefit of another is called a trust. A trust can be formal, with lots of legalistic provisions and directions to the trustee, or very simple. You can simply hand a check to one person, saying “here, take care of this for your brother” and create a trust. But don’t — that’s a sure way to destroy familial relationships and transfer family wealth to lawyers. It is important to have an actual trust document.

A trust can be created in your will (in which case it is called a testamentary trust) or while you are still alive (in which case it is usually called a living trust, though some lawyers prefer the term inter-vivos trust). The person who is entitled to receive benefits from the trust, whether right now or upon the death of the current recipient, is called a beneficiary.

A trust that prohibits the beneficiary from transferring his or her interest in the trust’s assets to another person is called a spendthrift trust. That doesn’t necessarily mean that the beneficiary is a spendthrift, though he or she may be.

The person who handles money for another is a trustee, and a trustee is a fiduciary. A fiduciary has an obligation to report the finances of the trust to the beneficiary (beneficiaries, actually — the people who receive benefits on the death of the current beneficiary may also be entitled to reports. But that’s a topic for another day).

If you create a testamentary trust, you have pretty much assured that your estate will need to go through the probate process in order to fund the trust. That’s not necessarily a bad thing, but it often comes as a surprise to clients. Avoiding probate while establishing a trust usually means a more expensive estate plan.

The question is deceptively simple, and the answers have a number of repercussions to consider. Can you simply disinherit a child who is not good with money? Yes, you can. That might lead to hard feelings, and even litigation, but assuming you have capacity and your wishes are clearly stated, the disinheritance should be effective.

At the same time, you can leave a disproportionate share of your estate to someone else. You can even tell them you expect them to take care of a sibling (or a grandchild, or a spouse, or anyone else you are disinheriting). But you can’t expect them to actually carry through. They may be saintly and responsible, but they are not immortal. Your daughter will probably leave her estate to her husband or children — and they might or might not carry through on her obligations. Or your daughter’s business might fail or she might be sued by someone she injures accidentally, or … you can begin to see the variety of problems that could arise.

Trustee choices

There’s a practical problem in addition to the legal/financial one. Do your children get along well? We can tell you that cutting one out and telling the other to take care of her brother will likely end that positive relationship. The disinherited child will feel like he has to beg for something he is entitled to. The favored child will feel like she has been thrust into a parental relationship with her brother. Each will resent the other.

By creating a trust, you reduce that problem — but you do not eliminate it. The trustee son can now point to the document to explain her decision (“see? Mom said I was not to just turn the money over to you to buy as many cars as you thought you needed”), but there will still be a fundamental change in their relationship. You might want to consider making someone else trustee.

But who? The sister who already doesn’t get along with the beneficiary? (Don’t dismiss this idea so quickly — the question is asked half-humorously, but half-seriously.) The bank? Another family member (the cousin who is a bank officer, perhaps)? A professional (your accountant, your lawyer, your broker)? A professional fiduciary? Each of those choices has positives and negatives, and they will be the topic for a future article.

Best of luck. It’s not easy to deal with your children’s different needs, abilities and expectations.

Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP and has been honored as one of the “Best Lawyers” in America for each of the last eight years. He is Vice Chair of the Elder Law Committee of the American College of Trust and Estate Counsel (ACTEC). Mr. Krooks has also served as Chair of the Elder Law and Special Needs Section of the New York State Bar Association (NYSBA). Mr. Krooks may be reached at 845-896-1106 or by visiting the firm’s website at www.elderlawnewyork.com.