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.
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