Trust Funds, Large Wealth, And Entitled Children

A couple days ago, I posted an article about how someone inheriting meaningful wealth should not feel guilty about receiving it because it reflected the will of the folks that created the wealth. Furthermore, money is itself a neutral thing–a tool if you will. Money can be used to accomplish great societal things and make personal dreams come true, but it can also be wielded tyrannically to exercise power over others and serve selfish desires at the expense of society. All it does is amplify the virtue and vices of those who possess it.

In that spirit, I wanted to discuss a topic that is very important to those who have accumulated much more in life than they could ever spend. And that is the question of what to do with the money when they die. Although there’s a limitless number of things that you can do with your wealth, the decisions generally relate to giving the kids the money, giving it to the kids plus family and select friends, charities, academic institutions, or some combination therein.

For today’s topic, I wanted to focus on a narrow subset within the “giving it to kids route”: Should you try to set up legally restrictive trusts so that the children can only touch the income and nothing else, or should the trust funds (and perhaps even tax-deferred and taxable investments) give the children the outlet to dissolve the trust, take the money, and completely screw it up?

To me, it is important that people have an opportunity to fail. The prospect of failure is partially what gives attaining success meaning in the first place. Otherwise, what value is there in creating a bubble-wrapped existence for a child that owes its comforts entirely to the prudence and labor of others?

Ideally, the children will have a chance to screw up early in life. Let’s say a kid receives a partial inheritance between the 18 and 22 age range. If the kid screws that up, then he is the beneficiary of a great learning experience. If a kid screws up a partial inheritance in his teens/early 20s, then he still has the rest of his life to learn from the mistake, and he would be able to learn from his mistake while the parents that created the mistake are still around so he could get still easily get things back together and move forward with his life.

But imagine if the trust is set up in a way that the kid could not possibly screw it up, and the child is basically wrapped up in financial and legal styrofoam. Then, what happens when the parent dies and the kid is on his own? Even if the parent manages to use tight legal structures to exercise control from beyond the grave, it then creates the dilemma of the child leading a meaningless existence. If a trust fund beneficiary has $75,000 in rents, dividend income, and bond interest coming his way every year, set up in a way that he cannot possibly screw it up, then there is a strong temptation to lead a life of loafing because the incentive to become economically productive would be muted.

The parent would run the risk of the kid turning into one of those people that responds to every person in charity with the adminition to “Get a job, you slob” and be completely devoid of sympathy for his fellow man. I’ve yet to meet someone that says “I want my kid to be an entitled little brat.” Well, when you shower unearned wealth upon a child in a way that he cannot possibly screw up, then the parent is laying fertile soil for the kid to develop an entitled mindset, because that is what happens when someone has material success (the $75,000 in passive annual income) without having to put forth the labor and prudent decisionmaking that was necessary to make it a reality. Bestowing large amounts of unearned wealth upon a child runs the risk of turning your advantage (abundance and wealth) into a disadvantage (by creating a child with a mediocre work ethic and lack of empathy for the struggles of others that do not have good fortune handed to them as an accident of birth).

It’s hard to qualify how this plays out, but sometimes, you see news headlines about how self-made businessmen generally tilt conservative and vote Republican, but the trust fund beneficiaries of these businessmen are even more conservative and hard-line Republican. It’s one thing to build a business and reach the conclusion, “I ought to be able to keep more than 65% of what I created with my own intelligence and labor, after accounting for state and federal taxes.” It’s quite another thing to be a 20-something year old cussing out Obama as you face an additional 3.8% surcharge tax on the $1.75 million left to you in a plain-vanilla taxable brokerage account.

If you are raising a kid that understands that money is a tool and he has his own internal motivations independent of money, then it probably does not matter how much money you give to a kid or how it is legally structured. If you honestly size your kid up and reach the objective conclusion that he has good values and a good work ethic, then you can feel comfortable giving him very large amounts of money because they will likely only amplify his good character traits (there is the risk that the money could be corrupting, but that would largely relate to age. A 30 year-old is not going to go change who he is in response to a large inheritance as much as a 20 year-old, all else equal).

However, if you reach the conclusion that the kid, quite frankly, cannot handle the money, then it might make sense to severely limit the amount of money that he can get. Bluntly speaking, if I was loaded and my kid was a bit of a brat, I would create a trust fund built on a foundation of $500,000-$750,000 that was set to pay out 1/2 to 2/3 of the median American household’s total income, somewhere around $25,000 to $30,000 annually or so. That way, if the kid turns around and gets his shit together after you die, you’re doing him a huge favor giving him a significant family blessing that will make sure he always has a roof over his head and food on his table. And if he has a typical job, then he will be able to afford vacations, perhaps a nicer home than he could otherwise afford, and of course, have the ability to invest that $25,000 to $30,000 in annual distributions. You can create a lot of wealth in a hurry deploying those distributions intelligently for a decade or so.

But I would not make the trust restricted. If the kid wants to take the $0.5 million after you die and blow it in Vegas, then having nothing would be a just outcome. Why should someone that cannot appreciate stewarding gifts from others have a right to a plush existence? If you cannot work, and if you cannot appreciate the efforts of those who came before you and did work, then having nothing is what should be deserved.

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7 thoughts on “Trust Funds, Large Wealth, And Entitled Children

  1. Matt says:

    Interesting read Tim. I find we think quite a bit alike in a lot of ways.

    One difference I have found in my travels though is that it all comes down to an entitlement/responsibility philosophy.

    I have found that the coddled children of hard working, successful parents are almost all quite liberal. The liberal outlook makes much more sense when you have no concept for the value of money and is where, incidentally, western welfare, gets it wrong more often than not.

    Good article

  2. Interesting article.

    I have been thinking alot of what to do with the savings I have for my two daughters. I came up with the idea that I am saving them all in stocks in an account that has my name to it. Whenever my children needs money for something important, like the cash needed to get a mortage (here in sweden you have to pay atleast 15% of the worth of the estate to get a loan), drivers license, school trips, maybe study abroad and other stuff that will make them evolve as human beings. Whenever one of those opportunities presents themselves I will be there with financial support and no interest whatsoever in getting paid back more than knowing they will do something they have use for the rest of their lives. When they get children of their own, I want to be able to buy items they really need but that are expensive.

    Thats why I am saving. To have a capital on the bank for the purpose of letting my daughters evolve as people. I dont want the money to be put in their account at their age of 18, and then their bad boyfriend makes her spend it on something not worthy. I can also see myself letting her get all the dividend each year in spending money and letting the value of shares grow. But I will try as much as possible to teach them the value of time and compounding. The youngest one is only 3 weeks so if she lets it compound for 50 years starting now, well, lets say she can retire at 50 and live like a queen 🙂

    Also, I really love your articles. Its like we share the same kind of thinking. I agree with everything you say and I check this blog daily. Keep it going!

    Cheers from Sweden 🙂

  3. Waterbuffalo says:

    I agree with a lot of what you said in this great article.

    It is a dilemma that many wealthy folks face, but at the end of the day, for me anyway, it isn't going to be my decision what they do with $1 or $1M once I am dead. I NEED to work hard to keep them from being brats while I am alive, and that is all I can do.

    I will probably give the lion's share to the most responsible of my children in the end though, 50-50 if they are both good at it. Right now, id have to slant it toward my daughter though, she is responsible with money, my son loves to spend all of his and often complains about having to put 10% in his piggy – but he does know he can WORK to get more money. But they are only 9 and 6, so they still have a long way to go.

  4. says:

    I think parents have an even higher responsibility to teach their kids to be financially responsible and living a useful life. That is a much more important legacy than the amount of cash in the trust or the bank. A well behaved and well educated child would manage even if you left them little.

    Really, the best kid one can have is one that does not expect free cash from their parents. Now get your kids out there to do summer jobs or even volunteer work! Make them understand the meaning of "work" and "money".

  5. says:

    Great article. I find I would do something similar to you. If I had large amounts of money to bestow, I would set up a dividend trust for each kid that would generate about $30-50K a year. Not enough to live high on the hog (especially if married with kids) but enough to live and live well if it was managed properly. If that much money were available to set up for the kids, I would have to assume that they kids grew up in a upper middle class or higher family anyhow, so $50k year might be enough to keep a single adult at that level (after taxes of course). It would also give the option that if married, one parent could stay home with the kid(s).

    I would also assume that the kids grew up in my household till 18 years old anyway and I would have hopefully bestowed up them the value of a work ethic, if you want more work more, work smarter, get an education, nothing comes to you free, proper money management, wants vs needs, etc.

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