Advice to help best friend with $1.4 million inheritance
Q: I'm writing to you about my best friend, Michael. We have been close buddies since primary school and he is like a brother to me. His mom and dad were even like my second parents, but unfortunately, they both died in 2020. Mike's sister is the financially savvy one of the two kids, and she was chosen as the executor for both parents. She has finally settled their estate and it's significant. They had investments, which have been redeemed, and the family home, which has been sold. Michael will inherit nearly $1.4 million, but that's not the problem. Mike is just terrible with money; it runs through his hands like water. He doesn't own a home, lives in a motel, has no cash, has bad credit because he's defaulted on so many loans, and he's lost friends because he borrowed money from them and didn't repay. Even his marriage failed, partly because he continually lied to his wife about money. He has always worked, but jumps around from job to job, and just seems to earn enough to get by. This gift from his parents could really turn his life around and set him up for his future, and it's his only chance because he won't be inheriting again. I'm scared for him and fear this money will soon be gone. How can I possibly point him in the right direction?
A: I commend you on being a fabulously compassionate friend. Michael is blessed.
I'll confess that I'm not particularly optimistic. Michael's parents created wealth for themselves, as well as a family legacy for their two children; but Michael did not inherit that gene, or their good habits.
Unfortunately for Michael, receiving a large lump-sum of cash - such as a bequest, lottery winnings, divorce settlement, etc. - does not automatically make one fiscally prudent.
I have a couple of strategies for you to share with your best buddy, to give him the greatest odds of financial success, and to alleviate your financial worry for him.
First, I advise a good heart-to-heart with Michael so you can share your deep concern for his economic welfare. He'll either completely agree with you or he'll tell you that he can manage just fine. If it's the latter, then he is in massive denial and really needs professional help, which you could lovingly suggest. On the other hand, if he already knows that he's not great with money and even shares your nervousness about the inheritance, then he might be open to a recommendation.
Second, I suggest that you propose a formal trust for Michael, with his sister as the trustee, and the money invested for Michael's benefit. This means any decision to withdraw money needs to be approved by his sister. (I'm discouraging you from acting as trustee, to avoid any tension between the two of you in your long-standing relationship.)
The trust needs to be legally established, and - of course - his sister has to agree to play this trustee role. I can only imagine that she is sympathetic to her brother's financial situation and I'm hoping she'd like to preserve the gift of her parents' judiciously saved money. An estate planning lawyer and professional accountant can assist Michael and his sister in seeing that the trust is properly structured from a legal, tax, contingent beneficiary, and alternate trustee perspective.
Caring more about Michael's financial future than he does would be a waste of your precious emotional energy. But if he's open to advice, then a formal trust may just help to protect Michael from himself. And you could feel pleased, too, knowing that the fiscal legacy of your second family is well-preserved.
We would all be fortunate to have a wise and considerate best friend in our corner - just like you.
Thie Convery, R.F.P., CFP, CIM, FMA, FCSI, is a wealth advisor in Dundas. Her column appears bi-weekly in The Hamilton Spectator. Thie invites your questions at TheSpecMoney@gmail.com or by visiting www.ConveryWealth.com.