If you are like millions of other Americans, you are working hard to save money for your retirement, and perhaps also to leave a legacy for your heirs. But of course, while any beneficiary is likely to appreciate receiving an inheritance, some beneficiaries are obviously much more capable of managing their money than others. Some beneficiaries may have mental or psychological issues that prevent them from being able to make sound decisions, while others may have debt or other financial issues that could result in seizure of the inheritance by creditors.
There are several ways to remedy situations like this. The most obvious solution would be to establish a trust for an unreliable beneficiary that would prevent him or her from being able to access the principal, or else define other limits for the use of the money. But creating a trust can be expensive and time consuming. There is another alternative that you may want to consider. Many annuity and life insurance companies now provide beneficiary restriction options on their contracts. These options allow policy or contract owners to specify the terms under which their beneficiaries can receive their money. This restriction can be either partial or total, and can come in the form of an arbitrary settlement option, such as straight life or life with period certain. For example, assume that you intend to leave $100,000 to your beneficiary, and he or she has $50,000 of debt that must be paid as soon as possible. If your policy or contract has a restriction option, then you could use that to specify that $50,000 could be paid out in a lump sum, while the remaining balance is converted to a lifetime income stream.
While restriction options cannot be used to create specific customized solutions for beneficiaries on the same level as a trust, they also do not cost anything and only take a moment to complete. The only other real disadvantage they have is that they are not available from every insurance company or with every contract.
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