Lord Voldemort and Avoiding the Trust Fund Baby

I’ve been a California estate planning attorney for 28 years. I’ve worked with thousands of clients and learned much from them. Estate planning clients tend to be good people because they invest time and money to protect their families and loved ones. Granted, estate planning is not purely altruistic because a typical California living trust estate plan includes documents that directly help the person who creates the estate plan, such as a durable power of attorney, health care directive, and HIPAA. But for the most part, people create an estate plan to make life better for their spouse and children.

In our law practice, our attorneys discuss with our clients how to avoid probate and protect their children’s inheritance from divorce claims and lawsuits. During these discussions, some of our clients ask us how to prevent their children from becoming trust fund babies. This is a great question.

Avoid the Trust Fund Baby

I believe the best way to ensure your kids will make good decisions with their money is for them to see you make good decisions with your money with a light touch. We’ve seen this time and time again: the adult children of parents who are smart with their money but yet don't let it control their lives tend to also be smart with their money with a positive perspective. Of course, this assumes the parents spend enough time with their children for their children to see and understand their parent’s perspective and use of money. 

Money does not have to be like Lord Voldemort: the thing which must not be spoken about among the children. If you talk to your children about spending, saving, and investing as they grow up, you will plant the seeds of wise money management. And this doesn’t mean you make them accompany you on tour as a Dave Ramsey groupie and watch you put cash in envelopes. It comes down to modeling common sense. You use common sense, and your children see you using common sense. And if you do, your kids will be alright.

While saving, investing, and smart spending are crucial components of wise money management, an often overlooked component is gifting. Gifting is the secret sauce that will revolutionize your life and legacy.

The old trope in family wealth is that you hold on tightly to your money and don’t let your children see it until you die. Damn it, you had to work for every penny, and so should they, and if you throw them a few dollars during your lifetime, they will get soft, reckless, and join the circus.

I had a client many years ago whose father desperately needed an estate plan because his mental capacity was rapidly eroding, and he did not have a durable power of attorney or a living trust. My client asked his father to set up his estate plan, and even offered to pay the attorney fees. But his father rebuffed him and told him in no uncertain terms to never bring up the issue again because when it came to his wealth, he considered his children the enemy. Well, ok then.

Don't Wait Until You Are Dead

Many moons ago, I started my legal career as a litigator. The thrill of the fight was fun, but most of the work was a tedious grind. After a few years, I pivoted and became an estate planning attorney. One of the most influential books I read at that time was Die Broke, a book by Stephen M. Pollan, an Upper East Side New York City attorney specializing in financial and estate planning for upper-middle-class New Yorkers. Fun fact: Pollan is also Michal. J. Fox’s father-in-law.

The book's premise is that you are better off dying broke than hoarding your wealth to leave a big pile of assets when you die. Pollan believes the burden of amassing assets for a deathbed scoreboard does you more harm than good:

For many people, there is an unwritten rule that you can’t share your wealth with your children until you die. This makes sense if you are concerned you will run out of money. But if you are doing well and your golden years look positive, you should consider helping your kids level up with a financial gift. The money can be used to help them pay college tuition or pay off student loans, to help them with seed money to start a business, to help them with a downpayment on a house, or to help them pay your grandchildren’s college tuition.

One of my favorite clients, who has since passed away, was a retired dentist. His son also became a dentist, and they worked together for many years. He and his wife spent lavishly on their children and grandchildren and had enough to live on. Their kids did not become spoiled brats because their parents taught them the value of money, which included seeing their joy when they used their money for their family.

Many years ago, we helped an older lady administer her living trust after her husband died. She was in her eighties and had a lifetime income stream that well surpassed her needs. She had a large estate, which, given her income, she would never need to touch. She also had four children in their 40s and 50s. Three were struggling financially from the great recession, and one had just lost his home from a hurricane. As we talked about updates she wanted to make to her estate plan, I asked her if she had considered making gifts to her children now, when they could use it, rather than at her death. Her eyes brightened, and she said she had never considered that. As she thought about how to help her children (and grandchildren), she became excited about the possibilities. We spent the next month working with her children to design the best way to transfer most of her wealth to them now rather than at her death. The family was elated, both mother and children. It was truly a win-win.

Gifts Are Better Than Loans

I know some of you are reading this thinking, ok, I’d like to help my kids, but I’ll make it a loan with a written promissory note and a deed of trust. And I’ll amend my living trust to reduce their inheritance if they haven’t paid it back. But keep in mind, if it’s a loan, it’s not a gift, and you’re no longer the generous dad, but now you are the bank loan officer.

Dave Ramsey discourages making loans to family members. Ramsey says that borrowing money from or lending money to relatives or friends often leads to damaged relationships. The financial arrangement can create tension and resentment between the parties involved.

Family loans often create friction in family relationships - between parents and the child, and between the child who gets the loan and his siblings. And unless you have an accounting background and are diligent in keeping your records current, reconciliation of the loan can be a problem at your death.

Several years ago, we did a trust administration where the father died, and his living trust referenced loans he had made over the years to his children. However, there was no definitive writing to verify the loan amounts or the payments. The son serving as the successor trustee could only find scraps of paper with cryptic pencil notations. He was unable to determine accurate loan and repayment amounts for each child. As a result, his siblings fought him over their trust distribution amounts and the trust administration spiraled into chaos.

Don’t confuse a loan with a gift. If you have decided to make a gift to your children make it a true gift with no strings attached.

Defeat Lord Voldemort

Your money and your assets are not sacred and are not something that must be kept under lock and key in some far-off land for fear that Lord Voldemort will steal them away. Your money and assets are tools to help you and your family enjoy a better life. Charles Dickens knew this. Was Ebenezer Scrooge happier before the visitation of the Christmas ghosts when he was tight-fisted and stingy, or after, when he felt free to give and help others?

Your children will follow your lead. And when they do, you will lock in generations of wise money management. Your children follow your model, and their children follow their model. That’s three generations and a legacy to defeat Lord Voldemort.