The Real Story Behind Trust Fund Kids
When we hear the phrase "trust fund kid," words like "entitled," "privileged," and "financially irresponsible" might come to mind. But another word we should associate with "trust fund kid" is "protected."
What Is a Trust Fund Kid?
According to a Forbes article published in 2021 about trust fund kids, three of the most common misconceptions are that trust fund kids all come from ridiculously rich families, they have it easy, and everyone who has serious money must have a trust fund.1 While these misconceptions may apply to some trust fund kids, it does not apply to the majority. The reality is that a trust fund kid does not necessarily live a life filled with lavish trips, designer clothes, and expensive cars - they are simply a young beneficiary of a trust. When most people hear the word "trust," they envision an endless pot of money freely accessible to the beneficiary. Trusts are created for a variety of reasons, however, and are not just planning tools that benefit the ultrawealthy.
Why Do Trust Fund Kids Have Such a Bad Reputation?
This bad reputation stems from a fundamental misunderstanding of trusts and the benefits they can provide. A trust often indicates that an individual has taken the time to intentionally plan for their children's or loved one's future, and instead of deciding to leave money to these individuals outright with no protections or conditions, they have decided to protect those funds. Whether the amount held in trust is millions of dollars or far less, trusts can be structured to ensure that the money lasts, is used for specific purposes, or is even held for the future benefit of children or loved ones. Added benefits of utilizing a trust are privacy, as trusts are not filed with courts and therefore are not subject to the public eye, and avoiding the probate process, which in some cases can be costly and time-consuming.
Preventing the Negative Consequences
Limit Control
After enlightening your clients about the real story behind trust fund kids, they may want to learn more about the positive ways a trust could benefit their own children or loved ones. To avoid the negative stereotypes surrounding trust fund kids, your clients will want to consider how much control they want to give the beneficiary over their own trust. Granting too much control could lead to uncontrolled spending or unreasonable purchases.
Make a Beneficiary Earn Their Inheritance
Clients may want to avoid the perception that their children or loved ones have it easy and should therefore consider building in provisions that will require their children or loved ones to "earn" portions of their trust. This structure can incentivize their children or loved ones to achieve more by reaching certain milestones such as completing postsecondary education, finishing trade school, serving in the military, or starting a business. Clients can elect to have the trustee purchase certain assets, such as a home, in the name of the trust to ensure that the assets are provided to the beneficiary, while the trustee is responsible for ensuring that it is properly maintained and not sold on a whim.
Consider Loans Instead of Outright Gifts
You may encounter clients who have worked hard to build their wealth and want to leave protected funds that can benefit their children or loved ones in a different way. There are many wealthy individuals who do not want to leave money to their children or loved ones because they believe it may disincentivize them to pave their own way. As it is, the majority of young adults do not have the ability to obtain financing with favorable terms on their own. For your clients who want to provide a more conservative form of support, they can allow their trust to provide favorable loans to beneficiaries that they will have to pay back with interest, allowing the principal to grow for future generations.
We Can Help Your Clients Avoid the Downsides of a Trust Fund Kid
Although being a trust fund kid often has negative connotations, your clients will likely want to make their own children or loved ones trust fund kids if they are educated about the positive aspects. We can help further educate your clients about how a trust can benefit them, protect their children or loved ones, and support their children or loved ones in the future.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
You have received this newsletter because I believe you will find its content valuable. Please feel free to Contact Me if you have any questions about this or any matters relating to estate planning.
