“I’m just gonna leave everything to Bubba,” says the gent across from me.
“That's certainly doable,” I tell him. “But what's the reason you’re disinheriting your other kids?”
“I’m not really disinheriting them,” he says. “Johnnie has some alcohol problems. Dolly is fine, but if her no-good husband gets his hands on the money, he’ll spend it all. So I’ll just leave it all to Bubba, and he’ll take care of the other kids.”
“So... when you say you’re leaving it to him, I take it you mean, he’ll be the trustee for those funds?”
“No, Bubba gets it all. Bubba’s honest, he’ll dole money out to his brother and sister, as they need it. But the will should just say that it all goes to him.”
I’ve run into this scenario quite a few times. I think of it as a kind of ‘trust on the cheap.’ But there are a number of problems with this kind of arrangement.
The most obvious is that Bubba wouldn’t have any obligation, legally, to give any of that money to his siblings. Yeah, his dad knows him and I don’t, and maybe he really is as honest as the day is long. But greed can change people. And his dad won’t be able to change the plan, at that point, because by the time that comes out, dad is already gone.
But let’s say Bubba is the fine young man his father thinks he is. There are still plenty of things that can go wrong with this kind of plan. Bubba could be in the middle of divorce proceedings when the money comes in, and giving away a bunch of money in the middle of a divorce is frowned on, to say the least, by the courts. Even though an inheritance is separate property in a divorce case, he may get in a lot of trouble for doing that. If he’s not in the midst of a divorce, but his wife doesn’t agree that he should give 2/3 of that money to his siblings, he may end up in a divorce because of it. Or at least, he may have some bad nights sleeping on the couch.
Or he could get into some bad investments, and lose the money. Or he could have creditors who may invoke the Fraudulent Conveyance Act if, having inherited money in his own name, he now wants to give it to his siblings instead of to his creditors. He may not have creditors now, but an unexpected medical crisis, or a bad mistake made while driving, or a failure to shovel the sidewalk on an icy day, or a lot of other things could lead to a judgment against him. And if that happens, all of it goes to the creditors. All of it, not just his share.
Is there a better way to handle it? Absolutely. Put it into a trust, with Bubba as the trustee (the manager of the funds) after you're gone. That way if he has debts or family issues, the creditors can only get at his share, not the funds that were intended for the other kids. And you can still give him the power, through the trust, to dole out money from the other kids’ shares to them, in his discretion, so that they don't get it all at once. But because the funds are in the name of the trust, his creditors can't get to it.
What it comes down to is that it ain’t a trust unless it says it's a trust. Doing this kind of thing informally may be tempting, but it can lead to a real mess.
Kenneth Kirk is an Anchorage estate planning lawyer. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult an estate planner who can take all the facts into account.
