Estate Planning Issue – (Q & A)

Aug 2016

Q Dear Rick:
My parents have asked my advice regarding their estate planning situation and I’d like your opinion. My parents are in their 70s and have two children, myself and my older brother. My older brother has had all sorts of personal and financial issues in the past and to make a long story short, is totally fiscally irresponsible. My parents recognize this and want to protect him from himself. They have no doubt and I agree that whatever he receives in an inheritance, he would blow over a short period of time. My parents are considering two different options to protect him upon their deaths. The first is to put his share of money into a trust naming me as the trustee. I would then be given the power to distribute the money to him on an as-need basis. The other option is that upon the last of my parents’ death to buy an annuity to provide a monthly income to my brother for life. My parents don’t know which way to go and I was hoping that you can give the pros and cons of each option.

Thank you.

A Dear Julie:
I love the fact that your parents do not want to give your brother his money in one lump sum. That may be the easiest way of going, but it’s certainly not the best. I wish when doing an estate plan more people would take an honest look at their beneficiaries to determine whether they should have their inheritances paid in one lump sum or staggered over a period of time.

In reviewing your situation, there are pros and cons with each option. With regard to the annuity, the positive is that you brother would not out live his resources. The annuity would guarantee that he would have some income coming in for the rest of his life.

The first downside of the annuity is that it is irrevocable. Once you annuitize the annuity, it cannot be reversed. Therefore, if your brother’s situation changed in the future and he did become fiscally responsible, you would not be able to change the terms of the annuity. In addition, with the annuity, it’s important to keep in mind that the payments would remain the same. The downside of this is that most annuities don’t provide any inflation protection; thus, even though the dollar amount would remain the same, the purchasing power would decline over the years. Lastly, if your brother needed additional monies, the principal of the annuity would be unavailable to him. In other words, the annuity is not flexible.

The trust, with you as trustee, does have a number of benefits. The first is that you would have more control over the money. Not only would you be able to direct the investments, but you can also control the distributions. In addition, you would have control of the principal which you would not have with the annuity. If your brother had an unexpected expense, as trustee, you would have the power to provide an additional distribution. You wouldn’t have that option with the annuity. Therefore, from a standpoint of management and control, the trust would give you greater flexibility. However, that doesn’t mean the trust doesn’t have its disadvantages.

With the annuity, there would be no investment risk. In other words, if the annuity company says you’re going to get $1,000 a month, you can rest assured you will get that $1,000 a month. On the other hand, with the trust situation, you are assuming an investment risk. The investments you choose within the trust may not perform and thus it is possible that you can lose money. In addition, what you also need to consider is that being a trustee, particularly for an older brother, may not be the easiest thing to do. If every time your brother needs money he needs to approach you, that may make your relationship somewhat strained. Of course, your parents can always get a professional trustee, but that comes at a cost.

With all things being equal, I would generally lean toward the trust. I am always a believer that in today’s world you need as much flexibility as possible and I believe that the trust accomplishes that. Also, keep in mind that down the road if you’re the trustee, you will have the flexibility to do as you choose. Therefore, if down the road you decide that it would make sense to take some of the money and buy an annuity for your brother, you could do that; you would have the flexibility.

When anyone does any sort of estate planning, especially where they’re talking about spreading money to beneficiaries over years, and in some situations decades, it is important to consider giving the trustee some sort of flexibility. After all, look how much things have changed over the last 20 years. I have no doubt that the pace of change will continue and therefore, I always lean toward the option with the most flexibility.

Good luck!

Rick is a fee-only financial advisor. His website is If you would like Rick to respond to your questions, please email Rick at