Testamentary trust and the “problem” dependent

What happens if you have a spendthrift dependent or one who is unable manage money? In making your Will you have to worry about leaving money to such a dependent.

This could happen if you have a family member who is:

  • A bankrupt
  • A gambler
  • Alcoholic or a drug addict
  • A spendthrift
  • Likely to marry someone you have grave concerns about (eg a gambler etc)
  • Intellectually disabled child or grandchild

With a bankrupt beneficiary the entire inheritance will have to be paid to the beneficiary’s bankruptcy trustee. Until all of the bankrupt beneficiary’s debts are paid or compromised the entire inheritance cannot be paid. If the inheritance is less than all of the debts then the bankrupt receives nothing.

Leaving money to a beneficiary in each of these situations will mean most or all of the inheritance disappearing quickly.

It will just be like someone trying to catch water poured into their hands.

To give or not to give

You could lock away the inheritance for a fixed period of time (say ten years) and then release everything after that. However, it may just be postponing the inevitable.

The money may just disappear more slowly.

Managing the inheritance of a ‘problem’ beneficiary

The solution in these cases is to set up a Testamentary Trust.

A Testamentary Trust is a Trust that is set within the Last Will and Testament.

How to deal with the money

The ‘difficult to manage’ beneficiary (‘DB’) may be left a specified sum of money so he/she has something to live on and is not destitute.

Instead of leaving the bulk of the money to DB it is instead given to Trustees. The trustees hold it in trust for DB, his/her ‘child, grand-children or great grandchild.

In a Testamentary Trust the Trustees hold the money and it is used at the Trustee’s discretion for the ‘maintenance, education, benefit or advancement in life’ of the beneficiaries named in the Testamentary Trust.

DB will not be able to access the money except through the trustees. The trustees will control how the inheritance is spent and keep it safe for and from DB.

The Will may provide an Expression of Wishes such as :

HOWEVER IT IS MY WISH without affecting the discretion of my Trustees pursuant to terms of this my Will to pay all or part of the income and all or part of the capital of the Fund to DB during his lifetime and only in the event that he fails to survive me then to pay all or part of the income and all or part of the capital of the Fund to the beneficiaries referred to in Paragraph X above”.

Creating a Testamentary Trust

At EzWills we do not do Testamentary Trusts. We can but we won’t.

Testamentary Trusts require lots of explanation. An online user is unlikely to completely understand everything.

If you are facing this situation, please do not use EzWills to make a standard Will. Consult a lawyer.

Testamentary Trusts are expensive to create but well worth the money to protect some beneficiaries from themselves. Otherwise you are just throwing away your money.

22 April 2019

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