Ask Liz Weston

Get smart with your money

spendthrift trust

Q&A: A sticky inheritance scenario

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Dear Liz: I have an adult daughter by a previous marriage who has no savings or retirement funds. I want to change my living trust to ensure that my daughter only receives a monthly amount similar to my required minimum distribution from my IRA, plus half of our paid-off house after my wife and I pass away. Do I need a trust attorney?

Answer: Restricting access to an inheritance might be necessary, but few adults would be happy about being put on an allowance. Unhappy heirs may be more likely to challenge an estate plan, so you should get expert advice if you want your wishes to prevail.

Even if your daughter is amenable, you still need an estate planning attorney’s help to craft the trust that doles out the money. Understand that inherited IRAs typically must be drained within 10 years. (The exceptions are for surviving spouses, minor children, the disabled or chronically ill or survivors who are not more than 10 years younger than the account owner.) If the beneficiary is a trust, the distributions don’t have to be paid out to your daughter, but any amount retained by the trust will typically be taxed at a higher rate. Plus, you’ll have to find someone to manage the trust, notes Burton Mitchell, a Los Angeles estate planning attorney. Who you select to be the trustee is critically important, as they will have to deal with your daughter for the rest of her life, Mitchell says.

Also, you may need to reconsider how you own your house if you want to ensure half goes to your daughter. Typically couples own property jointly, so that the survivor inherits automatically. If you want to bequeath your half of the property to someone other than your spouse, you may need to change the ownership structure to tenants in common. You’ll need to think this through carefully, since such a change would have legal, tax and practical implications that you’ll want an attorney to thoroughly explain. For example, if your spouse dies before you, she could leave her house to someone other than you, Mitchell notes. The house could be sold and you might need to find somewhere else to live. Conversely, if you die first, your wife could be forced to move if your daughter insisted on selling the house.

In other words, achieving what you want may be a lot more complicated and have more repercussions than you currently imagine. Talking with an experienced estate planning attorney can help you better understand your options.

Q&A: Their kids are spendthrifts. How do parents protect them with a trust?

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Dear Liz: My wife (71) and I (68) have been diligent savers our entire lives. We have accumulated IRA assets of approximately $2 million along with a house and other assets. Our total estate is under $10 million. We have two adult children in their 20s who did not inherit the saving gene. My question is: Does a trust exist that would maintain the IRA’s tax-deferred status, make required minimum distributions to our kids and include appropriate spendthrift provisions? Also, would the distributions be based on our life expectancies or on theirs?

Answer: Yes, you can create a spendthrift trust and name it as the beneficiary of your IRAs. Your children could be named beneficiaries of the trust. Required minimum distributions for inherited IRAs would be based on the elder child’s life expectancy. Your children would not be able to “invade” or tap the principal.

A spendthrift trust would not only prevent your kids from blowing through any money left in the IRAs. It also would prevent creditors from getting the money in case of bankruptcy. In many states, inherited IRAs are vulnerable to creditor claims.

Here’s the thing, though: This is a question you should be asking your estate planning attorney. If you don’t have one, you need to get one. People with small, simple estates may be able to get away with do-it-yourself planning, but yours is neither small nor simple. Trying to save money by using software or forms just isn’t a good idea. Whatever money you save may be wasted when your estate plan goes awry in ways you didn’t foresee, because you’re not an estate planning expert.

Trusts that name IRAs as beneficiaries, for example, must have special language to accomplish what you want, said Jennifer Sawday, an estate planning attorney in Long Beach. Without the right language, the IRA custodian might liquidate the IRA instead. That would trigger the taxes and lump sum payouts you’re trying to avoid.