There is something intrinsically understood about protecting a disabled or special needs beneficiary. Although the specific regulations may be complicated, most people recognize government programs frequently require financial eligibility and this eligibility requires the beneficiary to remain under a certain income and asset level.
However, we easily can overlook another type of beneficiary that needs protecting – the beneficiary who does not have a discernible disability, but cannot properly handle finances.
These beneficiaries typically fall into two categories: beneficiaries with identifiable problems and beneficiaries who are poor money managers.
One of the most frequent identifiable problems is addiction, which can include drugs, alcohol, gambling or any other costly vice. Not only do you risk a quick loss of assets by leaving them outright to a beneficiary who is an addict, but you could be creating a life-threatening situation by providing money to fuel their addiction.
Less threatening, but still concerning, is the identifiable problem of relationships. If you have a beneficiary who is in an unstable relationship or whose partner wields a lot of control over the beneficiary, you may feel uncomfortable leaving an outright gift to the beneficiary. Consider the purpose of the bequest. If you want to ensure your specified beneficiary receives the full benefit of the gift, an outright bequest is unlikely to give you that assurance.
The irresponsible beneficiary can be more difficult, not necessarily for legal planning, but for the emotional part of planning. Parents particularly can be deeply divided over whether to continue providing for the child after their death or to simply give the child an outright inheritance and hope the child uses it wisely.
Well-meaning friends and professionals simply may advise to let the child “sink or swim” with an inheritance. Realistically, however, if a parent has been supporting or assisting a child during his or her lifetime, it is unlikely the child simply will become a strong financial manager upon the parent’s death.
Instead of simply washing your hands and hoping the best, consider setting up a way for the child to continue to receive a monthly income after your death. An annuity or ongoing trust can provide a long-term income option.
If the beneficiary likely is to need a regular supplemental income, with no discretionary spending, an annuity is a simple, straightforward solution. A trusted financial adviser can help you explore options for long-term distributions.
However, for other beneficiaries, an ongoing trust is a better option. A trust ensures there is a person, or a committee of people, who have the power to pay according to the specific needs of the individual. For example, if you have a child with an addiction problem, an annuity payment will be gone before it is received and will almost certainly not be used to cover necessary living expenses. A trustee, however, could ensure expenses are paid directly rather than giving money to the beneficiary. Similarly, a trustee manager may be a better option for beneficiaries who earn enough money to pay their bills, but still regularly need additional assistance.
Of course, if a beneficiary is not disabled but is receiving SSI or another income-based benefit, regular monthly payments will cause a reduction or complete loss of the SSI benefits. If your goal is simply to trade public benefits for private payments, this option works well.
However, if you want to increase a beneficiary’s income, direct payments may not be a good option. An ongoing trust can ensure the trust is used to supplement, rather than supplant, the beneficiary’s SSI or other benefit.
Be intentional about your planning and be realistic about expectations for beneficiaries. Recognize their strengths and weaknesses and adjust your planning to fit those needs.
This article originally appeared on The News-Enterprise.
