How to protect inheritance from overspending

How to protect inheritance from overspending

The 1985 movie “Brewster’s Millions,” a remake of a 1945 film, which was based on a novel, tells the story of a man who stands to inherit a fortune from a distant relative he had no idea existed. There was just one catch: He can inherit the $300 million estate only if he can spend $30 million in 30 days without keeping any assets.

The point of the challenge was to make the heir so sick of spending money that he wouldn’t blow through the real inheritance. In addition to not buying any physical assets, he also couldn’t tell anybody why he was spending money so quickly and recklessly.

While that’s a creative way to protect a valuable estate from being wasted by heirs, it’s certainly not practical. But preventing heirs from spending their entire inheritance in a short time is a legitimate concern, especially if those beneficiaries are children or grandchildren who lack experience with money.

People who built a fortune from little to nothing with hard work and investing typically have developed the skills of self-discipline, resourcefulness and resilience. On the other hand, many people who find themselves instantly wealthy discover their “endless” supply of money is anything but. There isn’t a windfall large enough that can’t be spent through, as evidenced by the many lottery winners and professional athletes who file for bankruptcy after depleting their fortunes.

There are ways to pass along the assets you’ve worked a lifetime to build while protecting them from being squandered in a few years.

Place the inheritance in a trust

The most common way to protect estates is through the use of a trust. There are two basic types of trusts: revocable and irrevocable. Revocable trusts allow you to maintain control of assets while you’re alive, which means at any time you can revoke the trust or alter its terms. An irrevocable trust, on the other hand, effectively removes assets from your estate. You lose control of those assets and cannot revoke the trust or change its terms.

A type of irrevocable trust used when there are concerns about an heir’s ability to preserve the estate is a lifetime asset protection trust. Under this arrangement, the assets belong to the trust and never the beneficiaries. This protects the assets from being spent down, claimed by creditors or other parties in a legal action, including current or future ex-spouses.

A similar type of trust used to protect estates when passed to heirs is a spendthrift trust. This is also an irrevocable trust in which the trust maintains ownership of assets. A spendthrift trust allows the person who created the trust, the trustor, to put restrictions on withdrawals. A trustee, which can be the trustor or a third party, administrates these provisions. The trustor can establish a monthly allowance and/or requirements for when a beneficiary can collect funds, such as for education or to buy a house. Therefore, it’s important to appoint a trustee who will carry out the trustor’s wishes and not disperse funds whenever the beneficiary requests them. Also, a properly constructed spendthrift trust also shields the estate from possible creditor claims.

Establishing any kind of trust typically requires the service of a licensed attorney knowledgeable in estate planning.


A more flexible, though less protected option is to use estate assets to purchase an annuity.

If you’ve ever followed a state or national lottery, you know the jackpot amount is always much larger than the lump sum of cash the winner collects. That’s because the jackpot amount is based on a series of annual payments from an annuity; for example over 20 or 25 years. Lotteries were originally set up this way to not only produce a larger jackpot amount but also to prevent winners from spending the entire winnings. But nowadays, nearly all winners choose the lump sum option for the instant gratification of having a substantial amount of money all at once.

You don’t have to allow your beneficiaries the same choice. By placing the inheritance into an annuity, you can control the stream of payments to your heir. Income can last for a set period, such as 20 years, or you can designate it to last for their lifetime. And as long as the beneficiary is not designated as the annuity’s owner, he or she will not be able to convert it to cash.

Prepare heirs for their inheritance

In addition to trusts and annuities, estate owners can improve the chances that their estates won’t be squandered by heirs by communication and instruction.

The same habits that allowed you to build your estate should be passed along to your children and grandchildren before they inherit your wealth. Teach them the value of money, how to budget and the benefits of delaying gratification. Help them understand the power of compounding interest, both as it relates to saving and borrowing.

Also, it is recommended that you inform heirs of what they may inherit. This way, they can prepare for how their life may change once they have access to that money instead of being caught off guard and choosing to “live in the moment.”