by
Stacy Wise
| May 29, 2018
Lump Sum May Not Be The Best Option
By Rick Imhoff, CFP ®
It is not uncommon for many estate plans to provide for lump sum distributions to named beneficiaries at death. If an estate plan is not created, then state law will govern, which is a lump sum distribution. One reason this may not be a good idea is the lack of financial maturity of one or more beneficiaries such as in Carol’s situation below.
Carol has two grown children, Tim age 35 who is married with two children and Sue, age 32 who is also married with one child. Carol wanted to keep things simple when developing her estate plan and do like her friend Donna, by directing that all her remaining assets be divided equally between her two children in a lump sum. However, Tim and Sue are not the best at handling their finances.
Tim’s wife Nani likes to spend money on clothes, jewelry, and must have the latest toys and gadgets for their children. Tim has his own likes and that is spending money on tools and lawn care products, some he has never used. Carol figures if they got a lump sum, it would likely be gone in 3-6 months.
Sue is a little better with money, but her husband Bob is another story. When he inherited a small sum from his mother’s estate, he used it all to buy a camper and new fishing equipment. Carol believes Sue might be able to handle a lump sum better than her brother Tim, but Sue’s husband might influence her to spend part or all of it on things he wants.
After some additional consideration, Carol decided to create two testamentary trusts in her will, each funded with 50% of her remaining estate – one benefiting Tim and the other benefiting Sue. Carol names MidAmerica National Bank as her executor and trustee of the testamentary trusts. The trusts provide for the remaining funds to be paid out over a 25-year period, with 1/25th of the total market value paid out in the first year, 2/25th paid out in the second year and so on until the trust is depleted.
In addition, Carol included a provision in each trust to allow for payment of medical expenses for her immediate family and educational expenses for their children. Carol realized that the trust might be depleted before the end of the 25-year payout period, but at least it would be spread out over time where they hopefully will learn to better handle the periodic distributions and the funds would last significantly longer than a lump sum payout.
Rick Imhoff, CFP®, is Senior Vice President & Senior Trust Officer for MidAmerica National Bank. He can be reached at 309-647-5000, ext. 1130 or by email.
Investments are not FDIC-insured, hold no bank guarantee, may lose value, are not a deposit, and are not insured by any federal government agency.