When we think of the term “trust fund baby,” names like Hilton and Kennedy come to mind. However, setting up a trust fund for your children is beneficial even if you’re not leaving them millions of dollars.
Mr. and Mrs. Smith created a living trust that, upon their death, would pass their wealth on to their two children. They owned a home and had a modest amount in savings, and their net worth was approximately one million dollars. Their children were 23 and 27 at the time Mr. and Mrs. Smith passed away. They each received an inheritance of $500,000.
The 23-year-old had always dreamed of owning a Maserati. With his inheritance, he purchased a brand new GranTurismo convertible (for those of you non-car enthusiasts, that’s a $200,000 vehicle). This type of spending continued to deplete his inheritance, and within three years, the money was gone.
This situation could have been avoided if Mr. and Mrs. Smith had set up a trust upon their death. At the time you write your living trust, you can choose to have your child’s inheritance placed in a trust created in their name instead of them receiving a check upon your death. The money can then only be withdrawn per your terms.
There are multiple reasons why this is a good idea. First, placing an inheritance in a trust protects it from creditors. Second, it’s considered separate property and would not be accessible to a child’s spouse upon divorce. And finally, it provides the ability to place spending guidelines on the inheritance. This could mean limiting the amount received based on age, or earmarking the inheritance for education. It also ensures that your children will not run out and purchase a Maserati.
Although we want our children to be independent, they don’t always make the best decisions. It’s a good idea to provide guidance via a trust. Often, young people live “in the moment,” making purchases that speak to their knee-jerk, short-lived desires rather than investments that speak to their long-term needs. Sudden wealth can actually have the opposite effect the parent had intended. Rather than setting themselves up for future success, young adults can make impulsive purchases. Moreover, a sudden influx of money can squash ambition and drive. The 23-year-old who purchased the Maserati could have used the money toward purchasing a house or other financial investments that appreciate rather than depreciate.
The last thing you want is your savings to become a regrettable decision made by your child who didn’t know how to handle wealth they’re not used to. Sometimes mom and dad know best, and you can continue to show your kids the right way to handle money, even after you’re gone.
Kariann Voorhees and Holly Ratzlaff are attorneys at Voorhees & Ratzlaff Law Group