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 are not leaving them millions of dollars.
Mr. and Mrs. Smith created a living trust in order to pass their wealth to their two children upon their death. They owned a home and had a modest amount in savings. Their net worth was approximately one million dollars. Their children were 23 and 27 at the time Mr. and Mrs. Smith passed away. The two children each received an inheritance of $500,000.
The 23- year- old always dreamed of owning a Maserati. With his inheritance he purchased a brand new GranTurismo Convertible. For those of you non-car enthusiasts, this is a $200,000 Maserati. This spending continued as his inheritance depleted and within three years, the money was gone.
This situation could be avoided if Mr. and Mrs. Smith had set up a trust for their children upon death. At the time of writing your living trust, you can choose to have your children’s inheritance be placed in a trust instead of your children receiving a check upon your death.Upon your death, a trust is created in your child’s name. Their inheritance is placed in this trust and can only be withdrawn per your terms. There are multiple reasons this is a good idea. First, placing inheritance in a trust protects it from creditors. Second, an inheritance placed in a trust is considered separate property and would not be accessible to a child’s spouse upon divorce. And finally, the ability to place guidelines on the inheritance for spending. This could be limiting the amount received based on age or earmarking inheritance for education and 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 and it is a good idea to provide guidance via a trust. Often, young people live “in the moment,” and make 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 that money to help purchase a house or other financial investments that appreciate rather than depreciate.
The last thing you want your savings to become is 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.