Kids, The Inheritance Is All Yours, But…

Kids, The Inheritance Is All Yours, But…

By Estate Planning Practice Group

Do you worry about your children spending their inheritance unwisely? Or the money lessening their incentive to work? Or whether it will cause them to stray from the core values you feel are important? These are increasing concerns for many of our clients. What, as a practical matter, can you do?

There are several books on this subject that are helpful resources. One is Silver Spoon Kids: Communicating about Money in Healthy Ways, Teaching Strong Values and Compassion and Preventing a Feeling of Entitlement, by Eileen Gallo, Ph.D and John Gallo, J.D. The authors, a psychotherapist and an attorney, discuss subjects such as how to talk to your kids about money, involving children in philanthropy, and communicating values to children through an estate plan.

The authors also provide some examples for language one could put in a trust for a child to hopefully provide incentives and pass on family values. These suggestions include:

  • Encourage a child to obtain an education. Provide for distributions so a child can complete college, vocational or graduate school, but require a minimum grade point average, or even limit the number of years to complete a degree.
  • Encourage an adult child to be gainfully employed. State that if the child is not working without sufficient reason they will not receive any trust funds.
  • Add flexibility. Provide for discretionary distributions if a child, in the Trustee’s discretion, is being responsible but is unable to work because of disability, caring for children, or has a career that is socially responsible (such as a teacher) but does not have a substantial salary.
  • Authorize distributions if a child needs funds to enter a trade or business that the Trustee feels is likely to be successful.

Obviously, one can tailor trust provisions in an attempt to reward or restrict behavior in a myriad of ways. Some thoughtful parents even write a family mission statement and use it not only with the trust, but also as a guide for family entities operating during the parents’ lives, such as family LLCs. Some parents determine what amount they want the kids to have and simply give the rest to charity. Others set up a charitable fund and allow the kids to advise or direct which charities will receive distributions.

Some wealthy entrepreneurs can get very definite with their trust directives. As indicated in a Wall Street Journal article on trusts for children, one parent wrote in capital letters on the trust “NO DESCENDANT SHALL BE ALLOWED TO LIVE OFF THIS TRUST.” Some parents state that the Trustee will distribute to the child an amount equal to the child’s W-2 earnings. One parent reportedly willed his son one-half of the estate, and then provided the son will only receive the other one-half if, after an audit in five years, the inheritance has increased. A few parents have even required the children to have Prenuptial Agreements as a condition of inheritance.

Do these incentive trust provisions really work? Appropriate trust language can help prevent a child from buying too many fancy cars and not working, or from blowing it all at once on a gambling or drinking spree, or even help protect the child’s inheritance in the event of divorce. However, it is unrealistic to view trust language as a cure for any underlying problems a child may have. The parent can hope that the appropriate trust language does not add to any problems, and in the best case, helps the child be more productive and passes on some family values.

My suggestion for “incentive” trust provisions is to take care in picking an appropriate Trustee, regularly communicate your values to your children and the Trustee, and don’t get so rigid that the language backfires on you. As an example of the latter, one parent, in an attempt to promote marriage as a family value, said distribute “X” dollars to a child when the child gets married. One child has already collected three times!

If we can assist you with your estate planning needs, please do not hesitate to contact our office.