Summary:

So Junior wants to spend his inheritance faster than you can earn it and has his eye on a new red Lamborghini. What can you do to assure that Junior won't burn through his inheritance faster than a meteor hitting the Earth's atmosphere (for you science buffs re-entry temperatures can reach as high as 3,000 degrees F). Here's a checklist of things you can do:

¶ Buy an annuity:

Mandate that your executor take some portion of Junior's inheritance and buy a non-cancellable annuity.  If Junior cannot cancel or accelerate the annuity, the principal should remain relatively secure. If Junior is young, consider an annuity that will pay Junior an inflation adjusted amount every quarter for the rest of his life. This will assure Junior has enough money to buy chips and beer forever.

¶ Trust:

Put all of Junior's inheritance in a trust and name a tough trustee who will be able to withstand Junior's whining and begging so that the funds can be used judiciously over Junior's life. Institutional trustees, use to dealing with trust fund babies, and fixed hours (they don't have to listen to Juniors whining for money on weekends like Uncle Harry would have to), are a great choice. Delineate in the trust agreement specific items the trustee should pay for (tuition, technical school, etc.), and specific things the trustee should not pay for (bling, private yachts, etc.).

¶ Incentive Trust:

Make distributions from Junior's trust in part based on Junior's performance and conduct. If Junior earns $50,000, let the trust match it plus pay certain other expenses. If Junior earns nothing limit the trust to cover just basic needs and expenses. These trusts have been touted as a great technique to motivate underachieving heirs. In reality, these are not simple documents. How is "income" to be defined? If Junior joins the Peace Corp. or something equivalent he might earn little while accomplishing a lot. You may want a greater incentive for such altruistic conduct. The problem with incentive trusts is that it is difficult, if not impossible, to address the myriad of circumstances that might arise. It might be just as effective, perhaps more so, to have a discretionary trust and give the trustee the flexibility to react to the beneficiary's circumstances, rather than endeavoring to embody the range of behaviors in an incentive formula.

¶ Charitable Lead Trust:

Put some portion of Junior's money in a charitable lead trust ("CLT"). A CLT is a "split interest" trust. Charities receive a specified amount during the trust term, and thereafter a non-charitable beneficiary, such as Junior, receive the trust assets. It is a "split interest" since both charitable and non-charitable beneficiaries share. A CLT can be structured as a grantor trust (taxable to the parent) or a non-grantor trust (the CLT itself pays tax, but most of the tax liability will be offset by charitable contribution deductions). For example, a specific charity could receive a unitrust, or an annuity, payment for some stated period, say 20 years. That payment could be made to a donor advised fund so Junior can appoint the money to charities he selects. This can help teach Junior about philanthropy in addition to Gucci. At the end of 20 years Junior will get the money in the trust (or it can be paid into a further trust to continue to protect him). This approach defers Junior's access to this portion of the inheritance, provides something analogous to a retirement plan in case he burns through everything else, and hopefully improve his values during the interim.  The IRS recently issued new sample forms to be used for CLTs Rev. Proc. 2008-45 and 2008-46, 2008-30 IRB.

¶  FLP/LLC:

Convince Junior to contribute his assets to a family limited partnership or limited liability company for which you (or someone else trustworthy and stern) are the general partner or manager to control Junior's access to the assets. As a limited partner ("LP") Junior has no say in the management of the FLP, and in particular in distributions. If Junior is still a minor carefully evaluate transferring custodian accounts of Junior to an FLP/LLC. While many people are cavalier about doing this, it raises issues as to Junior's rights upon attaining the age of majority. See "Custodial Account into FLP", Practical Planner May 2008, page 4.