Disinheritance. It’s a dirty word, but one that I hear on occasion from my clients. Fed up with the huge sense of financial entitlement their children and grandchildren seem to feel, grandparents start to talk about cutting them off.
Most often, that means putting an end to the financial assistance they are currently giving. Less frequently, grandparents make plans to actually disinherit a child or grandchild from their will or living trust.
The Urge to Disinherit
Inheritances — and disinheritances — are issues that are emotional as well as financial. According to a 2007 survey of high-net-worth Americans by PNC Wealth Management, a member of the PNC Financial Services Group, 40 percent of total survey respondents said they consider the emotional connection they have with an heir to be one of the most important factors in determining how much money to leave an heir — more than that heir’s fiscal responsibility or financial need. So it certainly makes sense that if you feel your emotional bond with a potential heir is damaged, you might be tempted to tighten your purse strings.
But disinheriting a loved one has consequences for everyone involved (not just the disinherited), and is not a decision to be made lightly. For one thing, it will cause pain — and perhaps legal problems, in the form of a contested will — for your loved ones. The action may also have unintended financial repercussions: Cutting off educational support to a grandchild, for example, could put an unwelcome financial strain on your child if she was counting on your contribution.
The threat of disinheritance is also often used as a tool of manipulation. But really, do you want a family member to love you (or visit you, or care for you in your old age) simply because they want a payday?
If you’re not feeling the love — or if you’re dealing with a “rotten egg” — consider making financial decisions that are less permanent. Bert Padell, financial advisor to Hollywood's rich and famous, recommends that concerned grandparents allocate the wealth through a trust rather than altogether disinherit their children or grandchildren. Furthermore, adds the grandfather of six, if grandparents leave their estate to the grandchildren, skipping over the children, than the estate tax is substantially decreased.
Inheritance With Strings & Trusts
While Jonathan Forster, an estate-planning attorney and partner at Los Angeles-based Weinstock, Manion, Reisman, Shore & Neumann, isn’t normally a fan of attaching strings to an inheritance, he admits that they can be helpful when you have a child or grandchild with a gambling, drug, or alcohol problem that you don’t want your money to support. Forster is dealing with such a scenario right now; his solution for his client was to set up a trust for the heir and give the trustee the power to do regular drug tests. “If the tests come back positive, the family can withhold distribution of funds,” he says.
When there are two grandparents, you can also give the surviving spouse what’s called “special power of appointment” over the estate to re-include an excluded grandchild if he or she shapes up. “Give the kid a chance to rehabilitate himself or herself before cutting anyone off entirely,” says Forster.
If you’re still set on cutting an heir out of your will, keep these tips in mind:
Update Your Will or Trust
Make sure your intentions are clear, says Forster. Don’t just leave the heir out of your will. State that you are disinheriting her.
Change Your Beneficiaries
If you’ve set up a 529 plan for a grandchild that you decide to disinherit, you can change the beneficiary of that plan at any time. You should also update your life insurance and retirement account beneficiaries if they name the person you wish to disinherit.
Keep Gifting... to Someone Else
If you’re committed to gifting for estate-planning purposes, make sure that you don’t miss out on that benefit simply because you’re disinheriting someone. Gift that amount to another family member, a friend, or a charity. Says Forster: “You can [give a $12,000 annual exclusion] gift to anyone.”
How well do you get along with your grandchild and other family members? Want to know if your personalities mesh?Find out here.