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By Christine Benz | 06-14-2011 04:15 PM

Estate-Planning Tips for Parents of Spendthrift Children

Estate planning expert and author Deborah Jacobs on the pros and cons of leaving assets to children through a trust.

Christine Benz: Another category, I would like to discuss, Deborah, would be parents of adult children and where the children have not shown a strong aptitude with money, what are often called spendthrift children. What are some estate planning considerations for parents who are in that boat?

Deborah Jacobs: Well, that the word spendthrift really runs across a spectrum. Some parents would say that a child who spends money on purchases that the parent disagrees with is a spendthrift, but I think here we are really talking about people who could blow through money because they either manage it poorly or people who spend compulsively to the point of financial ruin, and certainly a parent doesn't want to be in a position of leaving an adult child in a situation where that could happen.

So, this is a very reasonable situation in which people might want to use a trust, and in effect then the trust functions as a legal wrapper for the assets. The title passes to the trustee, which is the person or the company that you have chosen to carry out your wishes. The trustees manage the assets, either by themselves or by hiring investment managers, and then based on what the trust says, they make distributions or payouts to your children.

But I do think that people need to keep in mind that, in effect then, your child is never going to be totally financially on their own. You create a situation, where instead of being dependent on you, the child is dependent on the trust. I would much rather see parents help their children become financially literate and good at these things, rather than in effect crippling them through adulthood by creating a trustee, who expresses the parents' wishes from the grave.

Benz: So something like this, though, could have implications and be valuable, not just for spendthrift children, but if a child has substance abuse issues, for example?

Jacobs: Substance abuse issues, also if you are concerned about who the child has married, and many people are, putting assets into a trust can protect them in the event of divorce or can protect them from other creditors.

It serves many functions, and not to discount the value of these functions that a trust can serve. It is not nearly as convenient as leaving a child an inheritance outright, and it does send a message to the child after the parent is gone that the parent didn't trust them for whatever reasons.

So, although I think the parent may have very good reasons for doing this and want to do it, I think that a parent who does this ought to discuss with the child what they are doing, and explain their reasons for doing it so that the child is not left trying to figure this all out or feeling discounted by the parent after the parent has passed away.

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