She Wants to Leave Money to Son on Installment Plan

Question: I am a widow with three children whom I love dearly. Each will inherit equally in my $400,000 estate when I die. My daughter and my younger son and their spouses have always managed their finances responsibly. My eldest son, now 60, is another matter. He is a hard worker with a long employment record at a place where he is well regarded. However, he cannot save a penny. He gives his wife just enough money to pay the bills but the remainder is his to enjoy his hobbies, he feels. I would like to leave his share of my estate not in a lump sum but rather in installments of $1,000 a month. How do I go about arranging this? Or can you offer a better idea?

Answer: You can set up what’s known as a spendthrift trust. These trusts allow money to be doled out by a trustee and typically are used in large estates when the beneficiary can’t be trusted to spend the money wisely.

But, Mom, really--what’s the point?

Your son is 60. He doesn’t sound mentally incapacitated or in the throes of an alcohol or drug addiction--the typical reasons for setting up a spendthrift trust for an adult beneficiary. He’s not likely to change his stripes, but it’s not as if this money is all that stands between him and the streets.

And although it may sound like a lot to you, his $133,000 share really isn’t all that much, particularly if depleted by the costs of setting up and administering such a trust. You should expect professional trust administration to cost about 1% of the trust each year--if you can find a trustee willing to handle such a relatively small amount.

You might be thinking you can skip having a professional trustee and simply put one of his siblings in charge of doling out the money. That, my dear, is a recipe for anger, resentment and disharmony in the family you leave behind. Talk to anyone who’s been put in charge of a sibling’s money, particularly if there has been any kind of unequal distribution--as this would be--and you’ll realize that this isn’t the answer.

You’re understandably concerned that your eldest child hasn’t saved enough for his golden years and that he’ll burn through whatever inheritance you leave him with little to show for it. But at some point, you have to let go. You tried to teach your children responsible money management and obviously succeeded with two-thirds of your children. That’s a better record than most parents achieve.

Unemployed at 56 and Eyeing the 401(k)

Question: I’m a longtime reader, first-time questioner. I was laid off recently at age 56. I have no desire to retire, as long as I can work, but at this age I am not sure how many job offers I’ll get. Given this situation, I am thinking of withdrawing money from my 401(k) under the distress (or whatever it is called) clause. Is this a situation where I can pay only the taxes that would be due on the withdrawal without being charged any penalty?

Answer: If you were terminated from your job--and not just temporarily laid off, to be called back later--you probably can’t get a hardship withdrawal, according to the good folks at Hewitt Associates, a benefits management company that tracks such issues. (And “hardship” was the term you were searching for, although such withdrawals are quite distressing for other reasons.)

If you’ve read this column for a while, you’ve seen all the warnings about how you can end up losing about half of any retirement fund withdrawal you make in taxes and penalties. You’ve also seen that when you spend 401(k) money, you take away all the future tax-deferred gains that money could have made, so a $10,000 withdrawal now winds up costing you $70,000 or more down the road.

Still, if you remain unemployed, you may need to consider tapping your funds early. Here’s what you need to know:

Though hardship withdrawals are generally available only to current employees, the fact that you’re older than 55 and “separated from service”--i.e., no longer working for your employer--means you can get access to your funds without owing the 10% early withdrawal penalty that otherwise would apply.

Your company, however, might have a rule that distributions can be made only in a single lump sum rather than installments. That would mean that unless you take evasive action, you would have to pay income taxes on the whole amount, even if you need only a small portion of the money.

If your employer insists on a lump-sum distribution, you can mitigate the damage by rolling your 401(k) into an individual retirement account. Then you would need to check out IRS Publication 590 and follow the rules for taking “substantially equal payments” from your IRA. The payments, which are based on your life expectancy, must be made for five years or until age 59 1/2, whichever is longer. So if you begin taking withdrawals now, you’ll have to continue until you’re 61--even if you do get another job and begin to regret raiding your tax-deferred nest egg.

Before you make any decisions, you would be smart to consult with a seasoned tax advisor. As you can tell, tapping retirement money is a tricky business, and one wrong move can leave you saddled with a huge tax bill.

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