Dear Quentin,

What are options for an elderly person to leave money to an adult child in her 50s, let’s call her “Mary,” who has been completely financially irresponsible (including being homeless at times)? Would an annuity purchased upon our death make sense? Or a trust? Who should be the executor of the trust? She should at least have a roof over her head as she ages. We’re talking about an inheritance of $500,000. Many thanks.

Trying to do the Right Thing

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Dear Trying,

It’s a lot of money and should not be given in a lump sum.

A revocable living trust — one you can change during your lifetime once you have put the assets into it and can become irrevocable upon your death — is used by estate planners to hold and protect assets during your lifetime, and ensure those assets avoid probate (saving legal fees); you also maintain the freedom to revise the terms of the trust during your lifetime.

You can instruct the trustee — a lawyer, accountant, family friend or professional trust company –- to release an income for your daughter, and include certain provisions that could withhold money. Reading between the lines of your letter, it appears that your daughter either has substance-misuse issues and/or mental-health problems that led to her homelessness.

Timothy Barrett, a trust counsel based in Louisville, Ky., gives an example of such a provision. In this guide for Klipinger, he said a trustee could opt to only make direct payments to the vendors for the child’s costs, expenses and obligations. This could include rent, education, utilities and/or transportation costs.

A special needs or spendthrift trust could also withhold most or all distributions if she uses substances, “including medically necessary prescriptions, not approved by the trustee in advance, keep all his rehabilitative therapy appointments, avoid relations with known substance users, and submit to monthly testing for substance use,” Barrett says.

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“I encourage, but do not require, that the trustee conduct a personal interview, demand a substance medical screening, or use other means to verify the trustee’s suspicions of harmful substance use. The trustee may require any reasonable medical and therapeutic intervention or rehabilitation before distributions are reinstated,” he adds.

Annuities as an option

Annuities are a possibility too, but they have less flexibility than a trust, and should only form part of your overall estate plan for your daughter. Fees can be as much as 10% of the value of your contract. “Typically, the more complex the annuity, the higher the commission,” according to Annuity.org. “The commission on a 10-year fixed-index annuity ranges from 6% to 8%.”

“A joint and survivor annuity is an annuity contract that guarantees payments so long as the contract owner or a secondary annuitant lives,” it adds. “Payments are slightly lower, but they last longer. Provisions can be added for making payments to a third party should both annuitants die before payments exceed the principal.”

“Often, survivors receive 50% or 75% of the amount of the initial payments,” Annuity.org says. “A 50% joint and survivor annuity will pay the surviving annuitant half the payment amount that payees were receiving when both annuitants were alive. A 75% joint and survivor annuity will pay three-quarters of that amount to the surviving annuitant.”

What’s more, early withdrawal fees are punitive. If you withdrew $20,000 you could pay 5%, or $1,000, which applies to the entire annuity withdrawal amount. “If you withdraw $50,000 instead of $20,000, your fee would rise from $1,000 to $2,500,” Annuity.org adds. You could also face an IRS withdrawal fee if you try to take money from your annuity before you are 59½.

But what if your daughter dies before it’s paid? If you don’t set up the kind of annuity that pays the remainder to other heirs, you lose — and the insurance company wins. Studies suggest the majority of financial professionals do not recommend annuities to their clients. Other annuities don’t have a monthly pay component. (Read more here.)

You can only do the best you can. The rest is up to your daughter.

More columns from Quentin Fottrell:

‘My husband and I have 8 kids’: We have $200,000 in a high-yield savings account at 3.75%. Are we beating inflation?

‘He’s an egomaniac’: My husband said he’ll flush his $1.5 million IRA ‘down the toilet’ rather than split it with me in our divorce. What can I do?

‘He always managed to play golf’: My husband of 14 years never worked and now we’re divorcing. He wants half of my $1 million home. What now?

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