Advantages of Trust Fund Babies

Advantages of Trust Fund Babies

Hello folks! Hope all is well. Today I want to explore a thought with you and that is what the benefits would be of making kids trust fund babies. I want to give this some thought because personally, is this something I would consider working longer to provide for my kids? Are the benefits worth me working a couple more years at my peak salary level to give them the gift of not having to work for a living?

Now hear me out, I’m not saying this is something I’m going to do or not do. We all hear the phrase “trust fund baby” and snarl at it with the thought of Paris Hilton coming to mind. But is that thought rooted in enmity toward a few over-privileged individuals who took advantage of their gifted wealth? Would that be narrow-minded? Or is it a thought and belief held up by a deeper understanding and examination of the pros and cons?

I personally think the spoiled trust fund baby is just a stereotype and not the norm. We should all bare it thought and fair consideration. If we have the means to do so, should we give our kids trust funds? With my Financial Independence (FI) target of $3 million, a few more years working would build that by another couple million…certainly enough to keep money from top of mind for my kids.

What is a Trust Fund?

First, let’s lay out what exactly a trust fund is so we are all clear. A trust fund is an account that holds any variety of assets (stocks, bonds, cash, property, etc) that are to be used for the benefit of an individual or an organization. The grantor of a trust (i.e. you as the parent) is the one who creates the trust and designates an individual (often a child or grandchild) or organizations (i.e. a charity or non-profit) as the beneficiary / trustee with the intention of providing financial security.

We’ll be talking about a trust fund solely as it relates to setting it up for children or grandchildren. Keep in mind, trusts can be set up and structured in many different ways. For example, by limiting access to the funds until the trustee reaches a certain age. I know that if I would have received a large lump sum of money at age 18 that I probably didn’t have the maturity and financial savviness to manage it well.

One common way of setting up a trust fund is to provide distributions at certain milestones rather than a lump sum at 18. For instance, the first distribution could be upon graduating college, the second upon reaching the child’s mid- to late-20s, and the third in his/her early- to mid-30s. This would be in a similar vein I would likely choose for my child or grandchild. This would entice them to be responsible adults, have reliance on some form of work to support their own lifestyle, and have maturity to help handle the money more appropriately.

There are also other benefits to creating a trust. They can reduce estate and gift taxes (granted the estate tax exemption in the US in 2016 was $5.45 million per individual, a fairly high hurdle), avoid assets going through probate court after your death which is costly, and to protect your assets from creditors and lawsuits.

For an additional resource on trusts, check out this article from CNN Money.

The Gift of a Trust Fund is a Gift of Freedom

Simply put, a trust fund provides freedom. I know that if I had a trust fund, my pursuits in life would have been different, for better or for worse. It would have provided me the freedom to choose to still go to the same in-state public university, to pursue an education based more on interest than gainful employment, and the flexibility to try to make a difference in the world rather than make a living in this world.

By giving my children or grandchildren a trust fund:

  • They would not have to work during teenage and young adult years and instead focus on school, athletics and other extracurricular activities. This could allow them to excel at a sport or skill and also do well in academics
  • It could be easier for them to get into a prestigious university and further help them achieve their life goals
  • It can be used as a tool to teach children/grandchildren about money and how to use and manage it
  • And as mentioned above, they would have restrictions on how and when they could access funds

Downsides of a Trust Fund

As a great of a gift a trust fund may be, it could also be a bad thing. This has been demonstrated for us a number of times by the children of celebrities. Significant wealth and a lack of responsibilities can lead to aimlessness and self-destruction. Additionally, kids who grow up rich may have a harder time finding true friends and those simply wanting to suck on the teat of rich people. I don’t think this would be a problem for us as we don’t live a rich and famous lifestyle, but it would be a risk. There are certainly steps that can be taken to avoid all of this for our heirs, but that may be easier said than done.

Examples of Trust Fund Babies

While there are plenty of public examples of spoiled trust fund babies like Miss Hilton, there are also plenty of examples of trust funds babies who have used it to their advantage, to help others and ultimately becoming great successes. Don’t believe me? Let’s look at the few listed below:

  • Megan Ellison (daughter of Oracle co-founder Larry Ellison): Larry is the seventh richest man in the world! Needless to say, this has provided his daughter quite a few advantages in life. But it has given her great flexibility in her life pursuits. Her company, Annapurna Pictures, has produced three films that have been nominated for the Academy Award of best picture including [Zero Dark Thirty], [Her], and [American Hustle].
  • Caroline Kennedy Schlossberg (daughter of John F. Kennedy): Another independently successful trust fund baby who has reached great heights in her life including currently serving as US Ambassador to Japan.
  • Howard Buffett (Warren Buffett’s eldest son): Described in a Bloomberg article as “a farmer, photographer, environmentalist, author, businessman, board member, world traveler, and volunteer deputy sheriff. He’s also a philanthropist who’s investing billions to solve some of the world’s biggest problems.” Talk about a life of experiences!

And as apolitical that I am, especially on this blog, we can also look at the Trumps. Hard to argue President Trump’s kids haven’t led successful lives either.

Not too shabby, huh. These are all great examples of the benefit that trust funds can provide. Warren Buffett himself was quoted as saying he wants to leave his kids “enough money so that they would feel they could do anything, but not so much that they could do nothing.”

Not a bad way to look at it in my mind.

Thoughts?

So have you considered providing your children with trust funds? Or do you remain vehemently opposed to the idea? Let me know your thoughts and considerations in the comments below.

Thanks for taking a look!

The Green Swan

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38 Comments

  1. I always liked Buffet’s perspective on inheritances – he wanted to give his kids enough so they could do anything, but not enough so they could do nothing. Trust funds can definitely give kids or grandkids a leg up in the world, but you do need to be careful not to give them too much at an early age where they can’t handle the money. I like the idea of doling out a trust at specific ages and milestones.

    1. Some tough considerations for sure and I think an important part is parenting and the kids upbringing so they don’t have an entitled personality.

      Thanks for the comment, Liz!

      1. Good post. I agree with Chief Mom here. What works for us is a beneficiary model with clear instructions to a trusted executor of my will on how will our young son receive assets. Broadly, it’s to leave the principal alone and withdraw only the dividends. Instructions are to pass on the dividend portfolio to his kids. The dividends for my son will be significant (his dad is working to increase them every Year!) to make life comfortable for him but not so much as to dissuade him from working altogether. We all have to strike a balance between ‘love’ and ‘care’.

        1. Nice approach. So you have your Will set up to work like a trust when you and your wife pass? This is similar to what we have setup currently. But I like the idea with the dividends and passing the principle on to grandkids.

          Thanks for sharing, 10!

  2. Good topic, will be interested to see responses. I’m with “Chief Mom” and Warren – if anything, I’d leave enough, but not too much.

    I’d worry about my child losing “the drive” that was so critical in those of us that are achieving FIRE. Is it worth sacrificing a few years of our lives, if there’s a risk it will make our childrens’ lives worse?

    The more I think on it, the more I go in circles. And, as usual, I end up realizing Warren’s pretty smart.

    1. Agreed, it’s easy to go in circles! One thought though is that if the kid is going a bit sideways the trust can always be revised or revisited. The entitlement to the trust can always go away!

      Thanks for the thoughts, Fritz!

  3. Hey, TGS. Great topic. I’m definitely conflicted. I worry like Fritz about how a trust fund might kill the drive of the recipient. But then again, freeing someone from the drudgery of work could allow that someone to do some amazingly constructive stuff. How about this compromise. Set up the trust fund, but don’t start distributing the money until the recipient turns 40? That would certainly reduce the moral hazard of free money.

    1. Hmm that’s a good thought. What I could do is set the disbursements to begin for kids when they reach the same age that I chose to retire. They’d have the motivation and responsibility of being self-sufficient adults with the prospect of retiring early at the same age as Lucy and I. Hmm… That’s a new angle to think about for sure…!

      Thanks for the great suggestion, Mr Groovy!

  4. I agree with the idea of helping my child to succeed but not giving them success. It’s a delicate balance. I expect my kids will inherit something via a trust, but I will do my best to structure the inheritance and my education to them in a way that they will use the money to fund their long term retirement or home purchase, not their life today. Too often as a kid I saw the rich kid in school amounting to nothing quickly, I don’t want that for my kids.

    1. Right on FTF, and structuring the education you give them is a key not to be overlooked! Great point.

      Thanks for the comment!

  5. We set up a revocable trust exactly for two of the reasons you mention:
    1: Estate planning. You can shield assets (especially real estate) from the lengthy and costly probate process.
    2: If something were to happen to us, we don’t want our daughter to become a millionaire at age 18. Instead, give her the money in installments and the full sum much later.

    But: We have no plan to “endow” our daughter with any sizable amount of “play money” while we’re still alive. 🙂

    1. Good thought there, ERN. So under no condition of your trust will disbursements be made to your daughter before you and your wife pass? I haven’t thought I’d that much but it makes sense. You can then choose how much support to give as she becomes an adult based on need, etc.

      Thanks for sharing!

      1. Exactly! Under no condition would she get access to the Trust, unless we’re both gone.
        Of course, she’ll get her money from the 529 (separate, outside the trust). Also, we can always decide to gift money to her, help with the downpayment, etc. but that’s so may years in the future

  6. I would absolutely love to do this for our little girl. She’s 7 now and we intend to fully pay for her college degree – without telling her about it. As far as she’ll be concerned, she will have no idea we saved a penny. I will allow her to think she is taking student loans, etc. I’ll even go as far as to have her sign phony loan docs. Then, when she graduates, I’ll tell her it was all taken care of. Or maybe I’ll have her take he loans and write a check to pay them in full when the first payment comes due. Either way, I want this to be a huge surprise at the end. That way, I hope, she’ll focus on actually learning in when she’s away at college.

    I would absolutely work another couple of years to invest in a trust fund. There is always risk; I would do my best to mitigate that risk and hope she does the right thing – at 50, when she gets the money 🙂

    1. Haha that would be something to see the look on your daughter’s face when you tell her the college debt has been cleared! That’s an interesting plan, thanks for sharing.

      The one thing I’d have to give more thought on that would be how to teach effective money lessons throughout childhood? I would otherwise intend to use myself as an example but that may conflict with them not knowing we saved for their colleges and instead choose to retire early! 🙂

      Thanks for the comment, MMM!

  7. My wife and I recently set up trusts for our son and daughter (twins) about six months after they were born. We opted to go the trust route for several reasons, some of which you included in your article:

    1. Eliminates the need to go through probate. This shields you from creditors as you stated, but it also eliminates any public record of the amount being transferred to your children. It also shields you from any family members that may wish to contest a will in court (yes, a family member can protest a transfer of assets in a will once it is in probate, and this is a nasty process and usually ends up with hurt feelings on both sides).

    2. The grantor can decide who manages the trust, either a family member or a private trust firm. We elected to go with private firm as they will be completely independent of a family member which would eliminate any conflict of interest as in the case of it being a family member or close friend. A private firm can also vet the child is living within the terms as outlined in the trust.

    3. We can restrict how much of the assets are transferred and when. In our case we have elected not to distribute the principal to our children (unless the trustee deems it absolutely necessary given financial hardship), giving them access to the interest only. Financial hardship in our case was classified as a medical emergency, ongoing health complications such as cancer, and any other hardship the private trustee firm may deem relevant. It is specific to guard against gambling and drug addiction, abusive family members trying to get at the trust, etc. As in the Buffett case, this gives them something but not enough for them to sit out a couch all day eating cheeto’s.

    4. Also, by not distributing the principal this acts as a wealth preservation vehicle to carry on through generations. For instance, if your child gets married and then is divorced sometime later after principal has been distributed, the principal is now subject to the divorce settlement. If structured properly in the child’s name only, you will be able to protect child’s inheritance from any poor spouse changes long after you are gone, which was very appealing to my wife and I.

    On the subject of college, my wife and I have decided to pay for two years of college. My mother has said she would like to pay for one of the years as well. We have decided it best for our children to figure out how to finance the fourth year of college on their own by taking out a loan. This means they are on the hook for some of it and they will have had to go through the process of financing something. Once they have graduated we want them to go through the grace period and see how much the interest payment will be. Once they have made the first payment on the loan, we intend to pay off the loan.

    1. Wow! Thanks for the awesome comment. And I love the way you went about setting up your trusts, very thorough.

      One point of clarification. Would the private firm take over management solely in the situation where something happens to both you and your wife?

      I live point #4! For me that’s one of the hidden reasons for setting up trusts so that it can pass through generations and act as a legacy. The principle gets diminished as it splits through generations but the next generations could always add to it for preservation purposes.

      Great work on the trusts. So great that would you mind sending over the doc templates so I can just change the names and be set for my family?! 🙂

      Oh, and can I call you JW? It has a nice ring to it!

      Thanks again for the comment, JW!

      1. If something happens to just one of us the private trust firm “begins” to activate. For example, if I pass away all of my assets that are in my name will be put into the trust; however, my wife will be able to preside over any/all decisions financially. The nice thing is, that if she remarries and thus gets divorced, the leaving spouse can not gain access to any of the funds within the trust (I’ve already told her that if I go before her and she remarries, I will come back and haunt her :)) That isn’t to say she could dissolve the trust and withdraw all the money, that that pretty much defeats the purpose of doing it in the first place.

        Feel free to call me JW, nickname in college was J-Dub.

        Feel free to reach out to me via e-mail, I assume you can see my e-mail address in your moderator box. There are some other nuances you may be interested in, or you may have other questions that may spur a thought that i have yet to think about. Look forward to hearing from you.

        JW

  8. I’m pretty sure I will be setting up a trust fund for my kids and like you said, distributing at specific ages and milestones. I would have to find the balance between it though because I wouldn’t want my kid to be not successful. I think just having them do fine and being happy is enough for me.

    1. It’s a tough balance, that’s for sure. I think so long as we do our best, thinking through everything we can, we can’t make a wrong decision.

      Thanks for stopping by, Smart Provisions!

  9. I have to say that I’m biased based on the experiences of my daughter. She was given a trust fund (from her mother’s side of the family) which she didn’t receive until she was somewhat older (20’s and then 30’s). It wasn’t a million by any stretch, but it was a significant chunk of money. Despite having been a working, functional adult, she quickly wasted the money between herself and her friends, became irresponsible, and found herself in a significant money hole, unable to pay her own basic bills. I have tried my best to help her deal with the money responsibly, but to no avail. She’s currently waiting on an inheritance to be distributed as she has “learned” to depend on the money of other people. You’ve cited some good examples where trust fund recipients dealt with their money well, but I’d be too afraid of the risks.

    1. I definitely want to avoid that! Gosh what a deal, I’m sorry to hear that. That’s a good example that no matter how hard we try, we can’t force our kids to do anything. You can lead a horse to water…

      That’s good food for thought, Gary. Thanks so much for sharing!

  10. As much as it would pain me to see my daughter struggle through life’s challenges, I would hold off quite a bit on releasing a trust fund. Maybe as late as 30s or 40s. The way I see it, she’s already going to have many advantages over other kids. She’s growing up in a safe, loving and money stress-free environment. That alone will give her an edge on success. I don’t believe she should go into debt to get an education, so that’s something I’m willing to support, although she’ll need to strive for scholarships. She should eventually inherit a nice financial nest egg from us, but hopefully it will come at a time where she can have the right appreciation for it, and also the right perspective as to its purpose. It’s a tricky subject, because you also don’t want to end up with a resentful child. Hopefully our upbringing will be solid, and she’ll have a good head on her shoulders.

    1. I think that’s a great way to go about it! Leaving an inheritance is very akin to a trust fund, it’s just the benefit of which is delayed (hopefully anyway, right!). I go back and forth on it, but either way I agree that a lot of focus needs to be placed on the right upbringing.

      Thanks for the comment, MYF!

  11. This is a great topic. It comes down to stewardship. I think the “parable of talents” might apply here. I like the idea of trust funds. However, it needs to be tied to being a productive, fiscally responsible, and a good steward of money before being able to receive the trust fund money.

    1. Yes great point. I hadn’t thought of that parable but it is somewhat similar. I’d tie in socially responsible too.

      I appreciate the great comment, Michael!

  12. It’s an interesting question, but I’d be worried about the kid developing a sense of entitlement (unless the kid had some disability or illness that made it difficult to make a living.) I think it’s enough to give most kids a good foundation and a debt-free education if possible. (Probably because I’ve watched my brother and my SIL get supported by parents well into middle age.)

    1. That is definitely the concern and drawback. I think we all know someone like that and if not we’ve all heard stories. It can be a balancing act as parents, huh?!

      Thanks for the comment, Emily!

  13. I haven’t given any serious thought to build a trust fund for my kids, but I am building an education fund. With this education fund, I hope that my kids will use it wisely to help them get ahead. I will probably give it some thought when my net worth is a bit closer to my FIRE goal.

  14. i think the strongest argument that Mr. Trump is not a dufus is that his kids seem sane. that said, i think trust fund kids often lack the money-sense that their parents used to create wealth. the trick is to find a way to convey that to the 2nd and 3rd generation that follows you. tell me if you figure that out.

  15. It’s definitely tricky, especially if you don’t know your kids/grandkids personalities yet. My mom pays my sister’s property taxes. I said, hey, if I could pay less living expenses I could increase my 401k contribution. If my sister and I each got trust money, I know we would do very different things with it. Considering my goal for FI is to be able to have a fun job regardless of pay…if a trust covered the basic monthly expenses, that’s what I’d do. I’d much rather have my parents around for a lot more years and get to FI on my own. 🙂

  16. Hi, I think my input could be helpful in that I, myself, was given a large sum of money at age 18 and actually didn’t touch it for the four years I went to university. I was still supported by my parents, but by the time I was 18, my work ethic had already been set. I was a diligent student and whatever I participated in, I strived for greatness. What really helped me though, was learning about money earlier on in my middle school days. I was given a debit card and a budget for school lunches and allowance and although I sometimes went over budget, my mother sat me down and talked me through why I had spent what I did and why and whether it was a necessary purchase and whatnot. That communication was important. Learning about credit cards, debit cards, checks, debt, things such as that, really helped me so that when I went into meetings to receive my trust I wasn’t so blindsided. I didn’t just nod my head and smile at the financial terms; I really listened to what was being explained to me and by that, I understood the significance of long term benefits versus short term ones. I really don’t think it would have mattered whether I received money at age 16, 18 or 21, in my specific instance, but I appreciate greatly that I received it. I don’t have a lot of friends who grew up with means. The friends I have who went to college, are so in debt, it stresses me out to think about the numbers and I’m not even the one who has to pay it back. I can’t put enough emphasis on how fortunate I feel to not wake up feeling stressed out over debt, where my next meal is coming from, whether or not my card will be approved, if my car broke down how would I pay to get it fixed or even get home, little things like that. It’s freedom from everyday stresses that many of us don’t even see because we accept them as necessities of life. They don’t need to be necessities to your children. I think it’s important your children know about them and are very much aware of their prescence to others, but they don’t need to be a part of their lives. As long as you’re a present and responsible and communicative parent, and your children are semi-functioning, semi-intelligent people who don’t take everything for granted, a trust is a grand idea. I hope this helps.

    1. Michelle, first off thanks so much for taking the time to leave such a great and thorough comment! Your input is very helpful.

      Looking back at my own youth, I think I would have been much like yourself and that is credit to my parents for instilling many of those values. That mindset you had and understanding long term benefits versus short term ones is key. Those will no doubt be priorities for us as parents teaching and passing those lessons down.

      I think as parents we all want the best for our kids including them being responsible and contributing members of society as well as easing some of those necessities of life that you mentioned. But to avoid “spoiling” them, its the values and humble mindset that are important to pass on. Who said parenting was easy!? 🙂

      Thanks again Michelle! Your comment made my day and was so helpful.

  17. Setting up a trust fund is a very personal decision. I would only suggest that anyone looking to set one up for their children consult with an experienced estate planning attorney. This way you can know that everything you want in place for your child is set up correctly, so that when you do pass away, there will be no problems for your child. Again, there are pros and cons to everything, including whether to set up a trust fund or not. However, enlisting the help of a professional will make sure everything is done the legal way. Thanks again for sharing!

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