Estate Planning for beneficiary who isn't good with money

[Gan020]

I am seeking some advice on how to prevent a beneficiary wastefully and recklessly spending the future proceeds from an estate.

The broad outline of the issue is that the beneficiary is currently in financial difficulties and history suggests that left to their own devices the beneficiary will not use the money to resolve the finanical difficulties but will spend it at an aggressive pace, or even if they did use it to resolve their financial difficulities the issue would just reoccur due to continued living beyond their means. The beneficiaries current financial difficulties are challenging but if the right steps are taken it is manageable.

I would appreciate any thoughts of how to approach this. I can think of two things:
1. Write the will so that the trustees buy an annuity with the proceeds of the estate. This would effectively give the beneficiary a steady income stream rather than a lump sum.
2. Write the will so that the trustees put the money in a Trust with the trustees required to release the capital and income in annual installments over say a 30 year period

How easy would it be to do this and how common is it? No 1. seems easier and there would be no on-going costs.

[scrumpyjack]

I am seeking some advice on how to prevent a beneficiary wastefully and recklessly spending the future proceeds from an estate.

The broad outline of the issue is that the beneficiary is currently in financial difficulties and history suggests that left to their own devices the beneficiary will not use the money to resolve the finanical difficulties but will spend it at an aggressive pace, or even if they did use it to resolve their financial difficulities the issue would just reoccur due to continued living beyond their means. The beneficiaries current financial difficulties are challenging but if the right steps are taken it is manageable.

I would appreciate any thoughts of how to approach this. I can think of two things:
1. Write the will so that the trustees buy an annuity with the proceeds of the estate. This would effectively give the beneficiary a steady income stream rather than a lump sum.
2. Write the will so that the trustees put the money in a Trust with the trustees required to release the capital and income in annual installments over say a 30 year period

How easy would it be to do this and how common is it? No 1. seems easier and there would be no on-going costs.

This article on Will Trusts by solicitors Irwin Mitchell might be of interest.

https://www.irwinmitchell.com/personal/ ... te%20funds.

[Clitheroekid]

I would appreciate any thoughts of how to approach this. I can think of two things:
1. Write the will so that the trustees buy an annuity with the proceeds of the estate. This would effectively give the beneficiary a steady income stream rather than a lump sum.

This is almost certainly not a good idea. Such a gift has zero flexibility, and if annuity rates remain low at the time of death the return might be extremely low. I haven't heard of gifts of annuities in Wills for several decades.

2. Write the will so that the trustees put the money in a Trust with the trustees required to release the capital and income in annual installments over say a 30 year period

Again, this is probably a bad idea. If you're going to the considerable expense of setting up and running a trust it's extremely unwise to be so prescriptive about the terms of the trust. The payments might be considerably more or considerably less than the beneficiary would require.

By far the best arrangement is a discretionary trust. As the name implies, the trustees have discretion as to how much they pay the beneficiary. These arrangements are ideal for a situation like this, where the beneficiary is irresponsible.

However, they aren't without problems. Firstly, you have to find trustees who are willing and competent to administer such a trust. This is a heavy responsibility, and can often be stressful, due to constantly having to consider (and potentially refuse) demands for money from the beneficiary. It can all too easily resemble the relationship between a harassed parent and a spoilt brat of a child!

Many - probably the large majority of - family members would not want to take on the role, so you may have to appoint professional trustees, who will charge by the hour. Such charges can easily rack up into thousands of pounds a year, and many tens of thousands over the lifetime of the trust. Consequently, you will have to assess whether the size of the potential trust fund justifies such charges. If it's £1m then the answer is probably yes, but if it's £10k almost certainly not.

There are also other expenses in running a trust, such as the need to obtain investment advice, and the need to file annual tax returns and deal with the calculation of tax as it affects the beneficiary, which would normally mean yet more professional fees.

If it's only a relatively small amount - say less than £25k - then your second proposal may be worth considering, if only because it's simple and cheap. Even then, though, the trustees should be given the discretion to pay the whole of the remaining balance to the beneficiary at some point before the end of the trust period.

[Charlottesquare]

I would appreciate any thoughts of how to approach this. I can think of two things:
1. Write the will so that the trustees buy an annuity with the proceeds of the estate. This would effectively give the beneficiary a steady income stream rather than a lump sum.

This is almost certainly not a good idea. Such a gift has zero flexibility, and if annuity rates remain low at the time of death the return might be extremely low. I haven't heard of gifts of annuities in Wills for several decades.

2. Write the will so that the trustees put the money in a Trust with the trustees required to release the capital and income in annual installments over say a 30 year period

Again, this is probably a bad idea. If you're going to the considerable expense of setting up and running a trust it's extremely unwise to be so prescriptive about the terms of the trust. The payments might be considerably more or considerably less than the beneficiary would require.

By far the best arrangement is a discretionary trust. As the name implies, the trustees have discretion as to how much they pay the beneficiary. These arrangements are ideal for a situation like this, where the beneficiary is irresponsible.

However, they aren't without problems. Firstly, you have to find trustees who are willing and competent to administer such a trust. This is a heavy responsibility, and can often be stressful, due to constantly having to consider (and potentially refuse) demands for money from the beneficiary. It can all too easily resemble the relationship between a harassed parent and a spoilt brat of a child!

Many - probably the large majority of - family members would not want to take on the role, so you may have to appoint professional trustees, who will charge by the hour. Such charges can easily rack up into thousands of pounds a year, and many tens of thousands over the lifetime of the trust. Consequently, you will have to assess whether the size of the potential trust fund justifies such charges. If it's £1m then the answer is probably yes, but if it's £10k almost certainly not.

There are also other expenses in running a trust, such as the need to obtain investment advice, and the need to file annual tax returns and deal with the calculation of tax as it affects the beneficiary, which would normally mean yet more professional fees.

If it's only a relatively small amount - say less than £25k - then your second proposal may be worth considering, if only because it's simple and cheap. Even then, though, the trustees should be given the discretion to pay the whole of the remaining balance to the beneficiary at some point before the end of the trust period.

Life interest trust is another solution depending upon sort of sum involved, income that might arise and the income needs of the individual- it at least keeps the sum intact though may have IHT issues for the estate of the party with the life interest

[scrumpyjack]

I have several times seen problems arise in trusts in my wider family and things can get very heated, when the trustee is a close relative of the beneficiary!.

If you go for the discretionary trust route, one thing that might help would be for a clear letter of wishes so that at least the relative who is trustee can hide behind 'I have to do what the deceased wanted'! That might reduce arguments.

The Life tenant route has the problem of the conflict between investing for maximum income (which the life tenant might like) or investing more prudently to respect the interests of the ultimate beneficiaries as well.

[CliffEdge]

If the estate is intended to pass in its entirety to the beneficiary, and not to be preserved for other beneficiaries at a later date, then surely it's up to him or her what they do with it?
Why are you entitled to interfere?

[Lootman]

If the estate is intended to pass in its entirety to the beneficiary, and not to be preserved for other beneficiaries at a later date, then surely it's up to him or her what they do with it?

Why are you entitled to interfere?

"Interfere" seems like a strange word to use to describe setting out wishes for what happens to one's assets upon one's death.

The problem here is surely not an uncommon one i.e. that there is an obvious beneficiary but there are also good reasons to not give them all the money at once. Examples:

1) The beneficiary is still very young and might fritter it away.

2) The cited situation where the beneficiary is in debt. It could be that the bequest simply ends up with the beneficiary's creditors, which is surely not the intent of the OP. You certainly would not want to leave money to an undischarged bankrupt, for example.

3) The beneficiary is in a bad marriage, with the worry that the soon to be ex wife might end up with some of the bequest.

A discretionary trust, assuming that a suitable and diligent trustee can be identified, seems the right approach to me.

[CliffEdge]

If the estate is intended to pass in its entirety to the beneficiary, and not to be preserved for other beneficiaries at a later date, then surely it's up to him or her what they do with it?

Why are you entitled to interfere?

"Interfere" seems like a strange word to use to describe setting out wishes for what happens to one's assets upon one's death.

The problem here is surely not an uncommon one i.e. that there is an obvious beneficiary but there are also good reasons to not give them all the money at once. Examples:

1) The beneficiary is still very young and might fritter it away.

2) The cited situation where the beneficiary is in debt. It could be that the bequest simply ends up with the beneficiary's creditors, which is surely not the intent of the OP. You certainly would not want to leave money to an undischarged bankrupt, for example.

3) The beneficiary is in a bad marriage, with the worry that the soon to be ex wife might end up with some of the bequest.

A discretionary trust, assuming that a suitable and diligent trustee can be identified, seems the right approach to me.

Ah thanks Lootman. I didn't realise the estate belonged to the OP.

[hiriskpaul]

How about putting restrictions on the DT? Something like No more that 10% of assets to be distributed to any single beneficiary in one year? You could have overriding clauses such as in the case of a medical emergency, which might help a beneficiary with an addiction problem.

Difficult problem to have. My wife's uncle is childless and is intending to give money to various nephews and nieces, some of whom will definitely not spend the money wisely. For example, one will plough into repaying the debts on his useless business just putting off the time when he has to face up to reality. Another is an alcoholic.

[Gan020]

Thank you all for your replies. It’s allowed me to come to some form of view as to possible ways forward.

To clarify because there seems to be some confusion, the estate will be that of my father and mother and they have two offspring, myself and my brother.

There is a difficult question around whether parents should will the estate with or without constraint. That will be for my parents to decide but I feel I am now in a position to advise them should they wish to discuss the matter in detail.

A solution would seem to be given the beneficiaries existing and previous conduct towards money would be to will the estate in a discretionary trust with external trustees given guidance around the speed at which the assets can be distributed. This would provide some protections around bankruptcy and divorce whilst giving my brother a long term source of income who additionally has insufficient pension provision. A variation on this might be to will a lump sum and put the remainder in a discretionary trust.

The deeper question for me is how much I should advise my parents if asked, whether I should steer the conversation towards a goal or whether I should just plain tell them. It is clear to me doing nothing is not an option as my parents are getting taken advantage of yet it is their money to do with as they wish. What I would like is for them to consider is that they have bailed him out a number of times and the problem has reoccurred over and over and whether going forward a different approach is required.

[CliffEdge]

Thank you all for your replies. It’s allowed me to come to some form of view as to possible ways forward.

To clarify because there seems to be some confusion, the estate will be that of my father and mother and they have two offspring, myself and my brother.

There is a difficult question around whether parents should will the estate with or without constraint. That will be for my parents to decide but I feel I am now in a position to advise them should they wish to discuss the matter in detail.

A solution would seem to be given the beneficiaries existing and previous conduct towards money would be to will the estate in a discretionary trust with external trustees given guidance around the speed at which the assets can be distributed. This would provide some protections around bankruptcy and divorce whilst giving my brother a long term source of income who additionally has insufficient pension provision. A variation on this might be to will a lump sum and put the remainder in a discretionary trust.

The deeper question for me is how much I should advise my parents if asked, whether I should steer the conversation towards a goal or whether I should just plain tell them. It is clear to me doing nothing is not an option as my parents are getting taken advantage of yet it is their money to do with as they wish. What I would like is for them to consider is that they have bailed him out a number of times and the problem has reoccurred over and over and whether going forward a different approach is required.

There seem to be two issues here, to put it brutally: 1. What the parents should do while they're alive and 2. How they should arrange things after they've gone.
1. It seems likely he'll never learn while he knows they'll bail him out. Tough love is required. He regards their money as his. It isn't.
2. After they're gone what he inherits is his to do with as he wishes.