11 Aug Avoiding the Dreaded “Trust Fund Baby”
No one wants to create a monster. We often hear from clients worried that the trust fund they set up for their children’s future will turn them into an entitled brat. Few people realize that it’s not a person’s wealth that spoils their character. Plenty of wealthy people are frugal, responsible, humble, and hardworking. The difference between successful and unsuccessful wealth transfers stems from the recipients’ expectations.
Ensure Your Kids Value Their Inheritance
We’ve written before about some of the inherent dangers in receiving a large pool of unrestricted money. There’s a reason some super-wealthy individuals have decided against creating a trust fund for their children; in fact, some don’t promise their children an inheritance at all. If you do want to pass on your wealth to your kids, but still avoid creating a “trust fund baby,” it’s important to place some restrictions on the money.
As illustrated in this article on Gloria Vanderbilt’s recent passing, it can be beneficial to grow up without the expectation of a large inheritance. Given the fluctuations in the market and the rising cost of elder care, it’s also smart not to make promises that might not pan out.
Knowing the value of money is essential for those who want their kids to grow up independent, happy and socioeconomically grounded. The truth is, all money has to be earned. There’s no other way to get it. If you don’t earn it then they must, but either way, someone did a lot of work. Obviously, the money is more valuable to the person who worked for it. So the question becomes: how do you give money to someone and ensure that they understand it’s real value?
Make Them Work For It
You can give money in a smart way, as Warren Buffet did. Instead of waiting until his death and handing over $85 billion to his kids, he provided each kid a mere $90,000 earmarked for investment or personal growth. His son, Peter, used that money to jump start his music career. This enabled him to get the head start he needed for a prosperous and meaningful career, without any expectation that he will become a billionaire through no effort of his own.
If you to follow Warren Buffet’s lead and enable your kids to “do anything, but not to do nothing” you can also limit the way they use the money. One way to do this is to place restrictions on the trust funds which allow the trustee to make distributions for only those purposes you deem productive and fiscally prudent. Examples of approved expenditures might be starting a business, pursuing higher education, or investing in real estate. These restrictions will ensure that your kids are not using their trust funds to elevate their social status through methods you deem to have little to no life value.
Preserve Your Kids’ Motivation
The other benefit of designing a trust fund with restrictions is that it keeps in place your kids’ natural sense of ambition. One of the best gifts a parent can give their child is the drive to succeed. Studies have shown that people with meaningful work are much happier and more self-fulfilled than those who don’t feel a personal connection to their career. This article from Partners in Prosperity outlines several case examples. In fact, those who have built their own wealth often continue to invest and create long past the time that they could comfortably retire, because it’s not just about the money for them. Their love of the work and belief in its importance drives them to look beyond financial gain. Your guidance to the trustee will encourage your kids to do the legwork of preparing themselves for a career rather than expecting their needs to be met without effort.
Encourage Values and Good Judgment
Of course, there’s a big difference between having no ambition and pursuing a career that doesn’t generate wealth. A restrictive trust fund can always be adjusted to accommodate a child who goes into public service or makes choices that serve the common good. What matters is that your kids understand your values, because that’s your real legacy.
Get the Right Help
It’s unlikely that you keep $5,000 in your pocket to hand out any time your kid says they want some money. Why set up their inheritance to do that? Our firm has helped many clients in creative ways to ensure that the distributions they provide their children are used to create real wealth and further their personal growth. Give us a call to see how we can help your family.