5 BEST Steps about Trust Fund Baby
5 BEST Steps about Trust Fund Baby: Trust funds get a fairly bad rap from popular culture.
After all, trust funds might breed “trust fund babies.”
You know, children born of privilege and spared character-building inconveniences.
Nevertheless, character is neither a function of personal wealth, nor is it necessarily deterred by it.
In fact, in many cases an inheritance just may give your heirs the tools to do great things.
If you have built up a large estate and are eager to share your wealth with your children, you may be concerned about their ability to handle it.
Trust Fund Baby What is
This is a phrase that refers to someone whose parents have created a trust account to benefit the child.
The trust fund that is created contains enough assets for the beneficiary to be able to live off of.
There is a stereotype of a trust fund baby as a spoiled child who does not work.
However, the stereotype does not accurately reflect many people who are trust fund babies.
5 BEST Steps about Trust Fund Baby
Fortunately, there are 5 BEST Steps about Trust Fund Baby you can take to help ensure they will not blow through their inheritance at a young age.
Build incentives and flexibility into a trust
An incentive trust is a trust that rewards children for doing things that they might not otherwise do.
Such a trust can be an effective estate planning tool, but there is a fine line between encouraging positive behavior and controlling your children’s life choices.
A trust that is too restrictive may incite rebellion or invite lawsuits.
Incentives can be valuable, however, if the trust is flexible enough to allow a child to chart his or her own course.
A so-called “principle trust,” for example, gives the trustee discretion to make distributions based on certain guiding principles or values without limiting beneficiaries to narrowly defined goals.
But no matter how carefully designed, an incentive trust will not teach your children critical money skills.
Put on your teacher’s cap
There is no one right way to teach your children about money. The best way depends on your circumstances, their personalities and your comfort level.
If your kids are old enough, consider sending them to a money management class.
For younger children, you might start by giving them an allowance in exchange for doing household chores.
This helps teach them the value of work.
And, after they spend the money all in one place a few times and do not have anything left for something they really want, it teaches them the value of saving.
Opening a savings account or a CD, or buying bonds, can help teach kids about investing and the power of compounding.
For families that are charitably inclined, a private foundation can be a great vehicle for teaching children about the joys of giving and the impact wealth can make beyond one’s family.
For this strategy to be effective, children should have some input into the foundation’s activities.
When the time comes, this can also be a great way to get your grandchildren involved at a very young age.
Consider distribution amounts and timing
Many parents take an all-or-nothing approach when it comes to the timing and amounts of distributions to their children, either transferring substantial amounts of wealth all at once or making gifts that are too small to provide meaningful lessons.
Consider making distributions large enough so that your kids have something significant to lose, but not so large that their entire inheritance is at risk.
For example, if your child’s trust is worth $2 million, consider having the trust distribute $200,000 when your son or daughter reaches age 21.
This amount is large enough to provide a meaningful test run of your child’s financial responsibility while safeguarding the bulk of the nest egg.
Or maybe you want to encourage financial success by making matching gifts equal to the amount of income your children earn each year. Be careful, though, not to accidentally dissuade your beneficiaries from pursuing other worthwhile though less financially rewarding endeavors.
Spell out your plans
Your estate plan can be a powerful teaching tool, but only if your children or other beneficiaries understand the lessons you are attempting to impart.
To avoid hurt feelings – or even litigation – it is important to discuss your plans with your family. For example, if you set up an incentive trust for your children, communication is critical to ensure they understand your motivations and the values you are trying to reinforce.
Or if you are limiting your children’s inheritance so they can make their own way, providing nothing more than a financial safety net so they will not end up on the street should they fail, explain to them your reasons.
Whatever approach you choose, ensure that everyone in the family is on the same page.
There are many ways to achieve this, including informal discussions, family letters explaining your intentions, structured family meetings and family mission statements.
Make your legacy last
If you plan on leaving a sizable amount of your estate to your children, consider incentive trusts, educate your children on money management and be smart with your distributions to them.
Perhaps most important, communicate with your children about the reasons behind your decisions.
These steps will increase the chances there will be money left to pass on to your grandchildren.
How to keep your kid from becoming a Trust Fund Baby
An incentive trust may be the best option for people concerned about children or grandchildren’s spendthrift ways.
Beneficiaries will only see a pay out if they earn a degree, for example. Or, alternatively, for every dollar that they earn, the trust will pay them a dollar.
So they have to be earning money before they get any money from the trust.
It all comes back to what you teach your kids while you’re alive.
No trust is going to fix them while they’re already kind of spoiled.
So just raising your kids to be financially responsible and giving them the impetus to work, even if you do have the money to provide for them.
Make sure you actually tell your children about the existence of the trust and what it means for their future.
Give your child age-appropriate information as they grow up and work to instill financial literacy in them from an early age. This will go a long way towards helping them be responsible with money even after your death.
Trust Fund Baby for Child
In the end, setting up a trust is a personal choice.
Do you want to see you children enjoy their trust while you’re alive?
Do you have a special item you want to transfer?
Do you want to keep part of your estate plan private?
Do you want to make sure your small business legacy is preserved for future generations?
Only you can answer these questions.
But if the answer to any of the above is “yes,” a Trust can help you make that a reality.
The fees associated with running a trust, however, may be enough to put people off.
A trust is considered separate legal entity and is taxed on its income annually.
If you have any other questions please feel free to contact us at
813-964-7100