A reader of Ask NJMoneyHelp asked how a grandmother could leave money to her grandchildren while protecting it from being spent irresponsibly. The reader suggested using an IRA as a possible solution and asked what safeguards could be attached to the gift.
In his response, Howard Hook, CFP®, CPA, CAP®, explained that contributing money to an IRA would not prevent the recipient from accessing or potentially misusing the funds. Because the IRA would be owned by the person receiving the gift, they would still be able to withdraw funds, even if taxes and penalties applied.
Hook said one possible solution is to establish a trust for each recipient’s benefit. He explained that a trust can include restrictions on how and when funds may be used, and an independent trustee can be appointed to carry out those instructions. The trust can be structured with specific age requirements or other conditions for accessing the money, or it can give the trustee discretion over distributions.
However, Hook also noted several drawbacks. Trusts can be expensive to establish because they require legal work, and if the trust is too restrictive, it may not accomplish the grantor’s intentions. He also explained that trusts are separate tax-paying entities and may face higher tax rates at lower income levels.
As an alternative, Hook suggested gradually gifting funds over time or establishing criteria for how the money should be used.
To read Howard’s full response, visit the original article on NJMoneyHelp: How Can You Protect a Money Gift From a Spendthrift’s Bad Habits?
Putting It Into Perspective
Many families want to help children or grandchildren financially while encouraging responsible use of those assets. Questions about gifting strategies, trusts, and long-term family wealth planning often arise when transferring wealth between generations.
Learn more about Howard Hook and EKS Associates’ approach to estate and legacy planning.
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