A parent may have a child or a grandchild that is not responsible when it comes to managing his or her money. A major concern is what will happen if that child or grandchild is left a significant inheritance through a will or a trust. One possible, unfortunate, scenario Is that this child or grandchild will probably spend the inheritance quickly and impulsively leaving none of it in savings for an emergency.

While one way to guard against this is to establish a spendthrift trust, the expense related to the establishment of a trust and the annual trustee’s fees could potentially drain the assets available for the child or grandchild. A potential alternative to the establishment of a spendthrift trust is to instruct the personal representative named in your last will and testament to purchase your spendthrift child or grandchild an annuity.

An annuity is an insurance product that is approved and regulated by the state insurance commissioner. It is designed using a mortality table and it is administered and guaranteed by a life insurance company. An investor, in this case the parent or grandparent’s personal representative, will make a single cash premium payment to the life insurance company. After the policy is issued the personal representative may elect to annuitize the contract for the beneficiary to start receiving payments for a chosen period of time such as 5, 10, 20 years, a lifetime). This process can provide a predictable, guaranteed stream of future income after the death of the person making the will.

The terms of the annuity state that only a certain amount of money can be distributed to the beneficiary of the annuity every month or every year. The amount of money to be distributed monthly or annually is measured by the person creating the will based on the projected needs of the beneficiary and will ensure that a reasonable amount will be retained by the insurance company for subsequent installment payments to the beneficiary during his or her lifetime. The annuity purchased by the personal representative will be irrevocable. Thus, the beneficiary may not approach the court for a distribution in excess of the monthly allowance or periodic lump sum payments for the life of the beneficiary.

Another advantage of a spendthrift annuity is that it can state that no creditor or a beneficiary can sue for the assets in the annuity until the required distribution time. The annuity’s guaranteed income stream helps ensure some measure of financial security for the beneficiary. As long as the beneficiary is not made the owner of the annuity, he or she is not able to readily convert that long-term income stream to cash.

We know this article may raise more questions than it answers for you. You may wonder what planning option is right for you. Do not wait to contact our law firm and schedule a meeting to discuss the right planning for you and your loved ones.