# How to give inheritance to kids without them blowing it?



## Addy (Mar 12, 2010)

A short background: My father recently passed. I have two siblings, two younger brothers. Both siblings have serious issues (ie long time addictions) but I still want them to benefit from the life insurance money. I am the sole beneficiary, due to my dad knowing my two brothers would blow it. But my dads wishes are for me to give my brothers the money as I see fit (a 1/3 share). I don't want to hold onto the money and give it to them on retirement as who knows how long I'm going to be around. I am considering an annuity (if thats what it's called) where the money would slowly be paid out on a monthly basis, both principal and any interest until it runs out.

It's not a big life insurance policy, I'm guessing $140K, split three ways thats about $35K each. I'm thinking that it would pay out about $100 or $150/m for 35 or more years. Not much on a monthly basis, but that may be a good considering my brother's addictions.

One of my brothers is married, and his wife will want the money up front but I can say, with a reasonable degree of honestly, that this is what my father wanted (as he did want me to give them the money in a responsible way). So that may become an issue, hopefully not.

I will go speak with a lawyer, but I don't want to reply solely on his or her opinion; I would appreciate any advice others here have for me.


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## DanFo (Apr 9, 2011)

In the situation you described I think your idea of an annuity would be good. I've never looked into returns on them before but if they have addictions it may be the best option than to give them the money in a straight forward cash settlement


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## dubmac (Jan 9, 2011)

My wife & her sister managed her father's estate -it was complicated by the fact that a third daughter has challenges with mental health and competence. She inherited a considerable sum. We would like her to buy a small condo and setup an annuity, but once they get the $, it is hard to do much of anything. She has made it clear she does not intend to follow our advice. You are wise to go slow, stay cautious and get as much help (legally & from a financial planning perspective) as possible.


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## the-royal-mail (Dec 11, 2009)

This could get a bit tricky if your brothers disagree with your handling of the situation and want your money before you are willing to pay it out. Are they aware of the terms of the inheritance?


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## Addy (Mar 12, 2010)

The terms are that I am the sole beneficiary and I am to distribute the money as I see fit. That includes withholding the money entirely, but that is not an option, at least not in my realm of conscious.

I do not intend to get advise from a financial planner as the dollar value is not worth paying fees (and I will only deal with fee based advisors). If there was more money involved then it would make sense.

The lawyer will be able to help me CMA as well as set up the paperwork.


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## peterk (May 16, 2010)

I would invest it yourself as you would your retirement savings (perhaps in a separate account if you want it that way) and distribute the dividends to your siblings accordingly. Whatever you do, tell your brothers that the way the accounts are setup you can't control how much is sent to them and it's all automatic, otherwise you'll be hassled about it the rest of your life.


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## MoneyGal (Apr 24, 2009)

I'm not sure how you get 140/3 = 35. 

You can buy a life annuity which will turn the lump sums over to an insurance company and give your brothers a guaranteed (relatively small) monthly payout for life. An annuity on $50K for a male in his early 40s (I am guessing ages here) with no guarantee will pay out roughly $200/month, unindexed, for life. 

There are many different annuity options and you would need to deal with a commissioned financial advisor, as there's no other way to buy these products in Canada.


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## Addy (Mar 12, 2010)

the 35 was just off the top of my head, i'm sure i'm off on the numbers. Plus the 140 could be off, it could be as little as 90K. I haven't cared what the exact numbers are at this point as the loss is still fresh. We'll find out the exact numbers next weekend when we visit with the lawyer and my father's work where the insurance policy was through.

I really REALLY do not want to deal with a commissioned financial adviser  but at least I know that I have to if I want to the annuity route.


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## Addy (Mar 12, 2010)

peterk said:


> I would invest it yourself as you would your retirement savings (perhaps in a separate account if you want it that way) and distribute the dividends to your siblings accordingly. Whatever you do, tell your brothers that the way the accounts are setup you can't control how much is sent to them and it's all automatic, otherwise you'll be hassled about it the rest of your life.


This may be a good idea, and I agree I would never hear the end of it otherwise. One thing I have going for me is that, as far as my brothers know, the beneficiary is me alone, (which it is legally according to my fathers will, for reasons such as them blowing the money and already having spent so much of his money my dad was worried it would be unfair to give them more) so hopefully this will make them realize they are lucky to get anything (that sounds harsh and I would never not give them anything, but I could use that point to stress that they can take it leave it basically).

I can't imagine what stress some families go through when a loved one dies and leaves a large amount of inheritance behind without it being detailed exactly what's to happen.... this is a small inheritance and I'd almost rather there be no money so I wouldn't have to deal with it.


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## peterk (May 16, 2010)

If they really are oblivious to money matters I'd tell your brothers that your dad left "all of you" an investment portfolio that the bank controls and will pay all of you equally whatever income the investment makes. It would sure be the least family drama. If your brothers already understand that you were given control of your fathers money due to their irresponsibility then you might not be able too pull this off though...

Sorry for your loss.


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## Argonaut (Dec 7, 2010)

I am young and probably not a source of the best advice, but I'm going to go against the grain here. If nothing was specified in the will, I would just divide it up evenly right here and now. If they blow it, they blow it. Relatively speaking, $35k or thereabouts won't be a life-changing sum of money. You save the family relationships and you save yourself a lot of time and headache.


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## Maybe Later (Feb 19, 2011)

I think Argonaut hit something important. You'll need to weigh the short- and long-term consequences of your actions, whatever you choose.

Blowing $35K on a new car/vacation/whatever they choose would not be a really negative outcome. 

Having the same $35K may be seriously detrimental if you have a reasonable belief that it would liklely harm your brothers health or safety if they had access to that money. 

I would decide based first on safety of all those involved, then on maintaining positive relationships, then on fiscal responsibility.


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## Karen (Jul 24, 2010)

Since you have no legal obligation to give your brothers anything, another possibility might be to tell them that you intend to set aside a share for each of them, but you're going to hold it in your own name until they show you that they have made serious changes to their lives. I understand that that puts an extra burden on you, so I can understand why you may not want to do it that way.

Your father has shown a lot of trust in you, but he has also placed a big burden on your shoulders - I don't envy you!


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## OhGreatGuru (May 24, 2009)

Talk to your lawyer and/or a trust company about the merits/demerits of trusts. This would put you at arm's length so your brothers can't pressure you to change the terms of the trust(s). But it isn't a lot of capital to interest a trust company, especially if the beneficiaries are going to be difficult clients.

Do your brothers have children? Maybe trusts for them would be better in the long run.


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## Karen (Jul 24, 2010)

It's my understanding that trust companies would not deal with such a small amount.


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## MoneyGal (Apr 24, 2009)

FWIW the trust arrangement would not produce a greater yield than the annuity (conditional on the annuitant being alive).


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## OhGreatGuru (May 24, 2009)

PS. Before you tell your brothers anything you may want to chat with a lawyer about the will ( I hope it was drafted by a lawyer.) The advice I read is that deliberately disinheriting children is something that needs to be done with great care, in order not to leave the will open to challenge from the disinherited. 

Proceeds of a life insurance policy are technically outside of the estate (that's one of their great advantages) But I think your lawyer will advise you to avoid making any statements to your brothers that it was your father's intent that they were entitled to a share in this money, as it would seem to contradict the wishes expressed in his will.

This needs to be viewed as a gift from you to your brothers, not from your father's estate.


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## the-royal-mail (Dec 11, 2009)

The more I read and think about this, the more I don't envy the OP. I do maintain that trouble is on the horizon. I would like everyone here to put themselves in the shoes of the brothers. Do you seriously believe they won't be calling every second day demanding their share of the money? I for one don't really think what the father did to Addy was fair. Now she's been turned into a villain and leaving the decision about how to divvy up the money to her puts a lot of pressure (by the brothers) onto her shoulders. 

I personally disagree that this is a gift from the OP to her brothers. This money belongs to her late father and was simply trusted to her to figure out how to distribute in the best interests of all.

Also, whether it's paid out $200 a month or in one lump sump won't change anything. If the brothers are SPENDERS, it will be blown regardless. I'm still not sure it's fair for the deceased to charge the OP with trying tiptoe around their poor spending habits.

I think the OP should let a little time pass before making any decisions and before consulting any professionals. 

Don't underestimate how much of a minefield this situation really is.


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## marina628 (Dec 14, 2010)

I have a brother who is horrible with money ,when our grandfather died in 2008 our father was left a house which he sold and split half between us 3 kids and kept half for himself.My dad gave me my brother's share to invest for him but told my brother to his face he wont see the money until he is 65.I have been funding my brother's RSP since that time with his share of the money.It means I had to take on responsibility to do his income tax etc but at least i know he will have something later on in savings.My brother signed a power of attorney with the bank to give me control to invest it.So maybe you can think of a long term investment for your brothers rather than feed them a bit here and there .


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## sags (May 15, 2010)

The executor of the will has legal obligations and duties to perform.

These include providing a copy of the will to all beneficiaries, updates on the progress of settling the estate, and signed release forms for the final statement of affairs before the estate proceeds are distributed.

If the executor fails in their duties, they are legally responsible.

I would suggest you discuss the matter with the lawyer involved.


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## Karen (Jul 24, 2010)

sags said:


> The executor of the will has legal obligations and duties to perform.
> 
> These include providing a copy of the will to all beneficiaries, updates on the progress of settling the estate, and signed release forms for the final statement of affairs before the estate proceeds are distributed.


That's true, Sags, but in this case the brothers are not beneficiaries of the will, so I don't think that would apply.


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## financialnoob (Feb 26, 2011)

Argonaut: I would normally agree, but the OP mentioned some addiction issues which would make me tread more carefully here. 

And Addy, I'm sorry for your loss, best wishes to you and your family. If the other family members don't know about it, perhaps it's best not to mention it for a few months to let people simmer down emotionally. I think the annuity is a great idea, but I'd rather not have to discuss the money aspect for several months. People may be less emotional and easier to work with when they're not also grieving.


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## sags (May 15, 2010)

http://www.estatelawcanada.ca/category/challenging-the-validity-of-wills/


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## Addy (Mar 12, 2010)

I spoke with the lawyer on the phone and he said it's very straight forward as I am named as sole beneficiary in the will and the policy and there is no property being willed, the life insurance policy is the only thing. Legally whatever money I distribute is a gift from me, but like trm mentioned, in reality it's from my father and I am merely the distributor.

It's interesting and informative to hear varying views on this, marina I was considering holding it until they turn 65, and it's still an option but like you, it would mean more work for me.


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## kcowan (Jul 1, 2010)

I would say that you have total flexibility in what you choose to do. That makes it difficult. Holding any inheritance until age 65 seems to be to severe. Putting it into a full-payout annuity will not make a difference in their lives.

I would tend to make it a significant amount over time but start payout immediately. So maybe $35000 over 10 years, or $3500/yr. Then it is big enough to make a difference now but they cannot blow it all right away. Plus it is simple and once you set it up, you are done with it. If the invested money makes more (>2%) then it goes on for more years until the money runs out. That way, you can also participate in the scheme and it will appear fair.


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## LondonHomes (Dec 29, 2010)

You could give them 35% of the money now, invest the rest and give them the rest in 10 years.

If they blow the initial money now it would probably be a good lesson for them and they may treat the larger amount with more respect 10 years later.


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## OhGreatGuru (May 24, 2009)

Addy said:


> I spoke with the lawyer on the phone and he said it's very straight forward as I am named as sole beneficiary in the will and the policy and there is no property being willed, the life insurance policy is the only thing. Legally whatever money I distribute is a gift from me, but like trm mentioned, in reality it's from my father and I am merely the distributor.
> 
> ...


Your father seems to have got his legal ducks in arow. As others have suggested, the only thing he could have done better was figure out how his estate could dole the money out to his sons, instead of leaving you with the problem.


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## Karen (Jul 24, 2010)

Another point to consider when making your decision is the question of income tax on the funds that are designated for your brothers. As long as it's in your name, you will be liable for the income tax on any income the funds produce.

Have you considered putting the funds in each of your brothers' names jointly with you, with both your signatures required to make withdrawals? Just a thought.


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## Karen (Jul 24, 2010)

sags said:


> http://www.estatelawcanada.ca/category/challenging-the-validity-of-wills/


Very interesting website, Sags. Thank you for posting it.

It still doesn't apply to this situation, though, because the funds are not technically part of the father's estate, but came from the payout of a life insurance policy.


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## OhGreatGuru (May 24, 2009)

- You don't want the earnings on the capital to be taxed to you.
- you want something at arm's length, so that once it is set up your brothers (or their spouses) cannot badger you to change the payment arrangements.
- They can't be trusted with large lump sum payments.

So, you are back to something like annuities or trusts, and we have one well-informed opinion that the amount is too small to interest a trust company (not enough capital or earnings potential to cover their administrative costs.) Unless you can think of something you can buy for them that they can't re-sell, but that would reduce their cash-flow needs.


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## AMABILE (Apr 3, 2009)

What do you think about giving them $1000.00 a month ?


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## cannon_fodder (Apr 3, 2009)

Perhaps this was already mentioned, but isn't the OP going to be responsible for any taxes on income generated by the life insurance payout even when giving the 2/3 of the principal to the siblings?

It isn't a case that the money was bequeathed to all children equally, thus any transfer of money to the siblings will really be a gift from the OP. So whether it is given as a lump sum or a series of payments, wouldn't the OP need to declare all income on their tax return?


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## MoneyGal (Apr 24, 2009)

Yes. (But hasn't this been discussed in this thread already?)


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## kcowan (Jul 1, 2010)

So OP makes the regular payout less by the estimated amount of tax that he will pay on the total income (e.g. 2% of $105K=$2k/3x.4 or $280 less per year, in my scheme the $3500 would becpme $3220).


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## blin10 (Jun 27, 2011)

Argonaut said:


> I am young and probably not a source of the best advice, but I'm going to go against the grain here. If nothing was specified in the will, I would just divide it up evenly right here and now. If they blow it, they blow it. Relatively speaking, $35k or thereabouts won't be a life-changing sum of money. You save the family relationships and you save yourself a lot of time and headache.


+1, your brothers might not like what you do with the money and it will create tension... just give them money and be done with it, they wanna blow it, then they're going to blow it


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## Addy (Mar 12, 2010)

You pay taxes on life insurance pay outs in Canada? When our daughter passed away my husband and I never paid taxes on it, and the insurance company didn't withhold any tax. Maybe we should have paid taxes? Our accountant was aware of everything, so I'm thinking it was tax free, or maybe I was just so upset at the time still that I'm thinking we didn't pay tax on it when in fact we did.


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## marina628 (Dec 14, 2010)

I guess it depends on their attitude , My brother appreciates me putting the reigns on him and at tax time he really appreciates the RSP.He is bad with money and knows it .Also the funds have always been in an account in his name but he needs my signature as well to access it.If he had an emergency I would help him out ,it is a pain in the *** to baby sit an adult's finances but if he had nothing I am the person who would have to take care of him later in life.


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## sags (May 15, 2010)

Some life insurance policies have a monetary value attached to them, as well as a death benefit. The monetary value has to be included in the estate.

Workplace insurance is generally term life policies with no additional value.


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## Young&Ambitious (Aug 11, 2010)

Eligible insurance expenses paid through after-tax dollars will results in proceeds at no tax-charge and vice versa. However, life insurance premiums are not an eligible deduction or credit for individuals. So Addy, this would be why you did not pay taxes on the proceeds you received as a payout. 

The confusion from the earlier posts ^ is that the income earned on the proceeds (eg. interest, dividends etc) as it is held by the OP, will be taxed in the hands of the OP.


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## cannon_fodder (Apr 3, 2009)

Young&Ambitious said:


> The confusion from the earlier posts ^ is that the income earned on the proceeds (eg. interest, dividends etc) as it is held by the OP, will be taxed in the hands of the OP.


This is what I was trying to get at. Even if the OP gives the siblings a lump sum payout from the life insurance payout, and if the siblings actually invest it in taxable accounts (I know, a big "if") then wouldn't the OP still be liable for the taxes?


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## Karen (Jul 24, 2010)

In most cases, the proceeds from life insurance are not taxable in Canada. Here's an article that explains the tax policy - see the heading: Life Insurance Payments at Death.

http://www.nevcon.com/resources/qd-taxtreatinsurance.html

The relevant part of that section states: "When policy proceeds are received by the beneficiary upon the death of the insured, no federal or provincial incomes taxes are payable on the amount received."

Here's a link to a more detailed explanation: http://www.ehow.com/list_6740406_canadian-life-insurance-tax-laws.html


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## MoneyGal (Apr 24, 2009)

cannon_fodder said:


> This is what I was trying to get at. Even if the OP gives the siblings a lump sum payout from the life insurance payout, and if the siblings actually invest it in taxable accounts (I know, a big "if") then wouldn't the OP still be liable for the taxes?


No. Gifts between adult siblings do not result in income attribution back to the gift-giver. 

The first random link I found that provides more info: http://www.ritceyteam.com/pdf/income_spl_w_children.pdf


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## andrewf (Mar 1, 2010)

^ I think you misunderstood the question. 

If OP takes the payout and puts it in a HISA at 2%, OP would be liable for income tax on the interest whether she gives the interest as a gift to her brothers or not.


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## MoneyGal (Apr 24, 2009)

Aroo? Now she's only giving the interest on the investments? That will be a very small lump sum, no?


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## cannon_fodder (Apr 3, 2009)

Thanks, MG. Immediate family is treated differently than spouses when it comes to attribution. Good to know.


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## hboy43 (May 10, 2009)

Hi:

I once asked about setting up a trust with a bank. It was a minimum $5000/year, so probably not worth consideration for any amount under 1/2 million.

Of course, there is no reason a bank has to be a trustee, could be anyone, including the OP. 

Maybe find a family member to be trustee, said family member too far away geographically to be hassled in person. Trustee would have an unlisted phone number so all correspondence has to be in writing. It would be too much work for the brothers to hastle the trustee, and they would likely eventually grow to appreciate what comes their way.

hboy43


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## Addy (Mar 12, 2010)

Just a small addition, there is a pension to be paid out as well. My father wants most of this to go to my husband and I, with a big chunk going towards both grand children. I am the sole beneficiary and want to find out the best way to allocate the funds. There is approximately $160,000 which is taxable on payout. I am going to research if there's a way to transfer some of this directly into an RRSP for me (I only have about $60K room in my RRSP however!) then the rest I suppose will have to be paid out and tax withheld.

Does anyone here know if there's ways to minimize taxes on a pension pay out? It's not a defined benefit pension, it's the other kind (not sure what it's called) if that makes a difference in Canada (I realize it does in the States). And what would be the best way to allocate the money towards the grandchild that isn't my child? Her parents (my brother and his ex) are both addicts so I have to be careful the money doesn't in any way get back to them as my dad really wanted the money for the kids schooling. An RESP is open in the other grand childs name but I am waiting on the paperwork to find out who has control over the money (if it's one of the parents it won't be a good idea for me to add money to the RESP).

Due to the smallish amount I'm trying to do this without consulting a fee based advisor (which is the only kind of advisor I feel comfortable with by the way), so if anyone has knowledge in this area and can offer me advice I really appreciate it.

Thank you to everyone who has offered advice, it's very helpful and also very interesting to see how others would approach this as well!


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## SCSCCC (Aug 16, 2011)

*wills*

There is something called a Henson Trust. It is more expensive to set up and I don't know all the details but it allows the beneficiary to receive a certain amount of money even if they end up on social assistance. I have to set one up for my daughter who has is disabled. Does anyone know about this kind of trust?


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## OhGreatGuru (May 24, 2009)

Addy said:


> Just a small addition, there is a pension to be paid out as well. My father wants most of this to go to my husband and I, with a big chunk going towards both grand children. I am the sole beneficiary and want to find out the best way to allocate the funds. There is approximately $160,000 which is taxable on payout. I am going to research if there's a way to transfer some of this directly into an RRSP for me (I only have about $60K room in my RRSP however!) then the rest I suppose will have to be paid out and tax withheld.
> 
> ...


If this similar to an RRSP, it can be rolled over only to a spouse without tax consequences. Otherwise, the payout is taxable income to the estate of the deceased, even if a beneficary has been named.

So:
a) Dad needs to make sure there are enough other assets in the estate to pay the tax, otherwise CRA will come after the beneficiary for it. (Maybe check with the pension administrator and see if they automatically withold income taxes.)
b) When you receive the money, you can of course contribute as much as you want to your RRSP up to your allowable contribution limit.
c) Your Dad can't give a sizable chunk to the grandchildren if he has named you as beneficiary. Unless his pension plan allows him to name multiple beneficiaries, he either has to trust you to pass it on by some informal agreement; or he needs to have it paid to his estate instead of to you, and spell out in his will how he wants it distributed. But of course that would tie it up in probate, and possible lengthy delays in getting it paid out.


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