How to avoid creating a trust fund monster: Building estates that empower (not spoil) the next generation

We want the best for our kids–for them to be happy, healthy, and love one another. And after a lifetime of working hard and weathering the ups and downs of the market, it can be heartening to know that the toils of your labor might help set up your children for success along their own paths. But money often serves as a magnifying glass, enhancing opportunities when things go well or fraying family relationships when jealousy or greed creep in. And as you consider how to leave your estate to your children, you may have a nagging feeling you can’t shake. Is leaving everything to your kids the right thing to do? Will it serve to lift them or weigh them down? And if so, what’s the best way to leave wealth to your heirs?

That nagging feeling may come from wanting to avoid a very real phenomenon: The trust fund monster. The child or young adult that inherits gobs of money and proceeds to buy cars and throw parties, or spiral down a path of boundless hedonism. And, no less tragic in some respects, the child who has so much promise, endowed with vast creativity and intelligence, who–rather than embark on a challenging career that allows them to fulfill that promise–chooses to flitter through life, safe in the cocoon of the trust fund they’ve been left. 

So. Where does that leave you, as a parent, wanting the best for your child? How do you structure your estate in a way that makes sense–that’s in accordance with your values and how you see the world and will set your kids up for success?

It would be nice if there were a single, simple answer here, but there’s not. Like so many things in life, it depends. There are varying perspectives on whether, how, and how much to leave kids, even amongst financial advisors and estate attorneys. It’s a personal decision, and different approaches will be right for different families. 

I spoke with three different experts to help ferret out some of the key points we should all be thinking about when it comes to leaving an inheritance. Because even if there isn’t a simple answer, there are some core tenants we can all think about as we raise families and consider what to leave them – and how.

Use your values as your north star

There was one common theme in all three of my conversations about how to pass down wealth, and that was values. Values enter the picture here in two primary ways:

  1. Passing your values down to your children helps to ensure (though it does not guarantee!) that if they do receive an inheritance, they will steward it in accordance with those values.
  2. You can shape your estate plan in a way that reflects your own values.

What values are we talking about here? 

Let’s start with what money means to you. Helping kids understand what it took to earn and save the assets in your estate gives them (hopefully) more respect for it. But beyond how you earned the money is what you can do with the money. What would you normally consider to be frivolous versus deserving?  What is your responsibility to your community? To those less fortunate? To causes and charities you care about?

Steve Lockshin, co-founder of Vanilla and AdvicePeriod, put it succinctly: “There’s no substitute for good parenting,” suggesting that family values and how they are passed down is the biggest influencer of inheritance success.

Money talks: Taking the taboo out of financial conversations

Instilling values in kids sounds obvious, but many of the challenges of second-generation wealth happen simply because kids don’t value money or community in the same way their parents did. These values are instilled by modeling, but when it comes to values around money especially, it also takes a conscientious effort to have meaningful conversations around money.

Westray Veasey, Principal and Chief Fiduciary Counsel for Trust Company of the South  (a Vanilla customer), oversees the firm’s legal matters, including trust activities, and has a particular focus on estate planning. Because her firm provides trustees and executors, she not only has experience with the drafting of estates but also administering them.

“Things go well when wealthy children are raised to understand the significance of the wealth they’re receiving, and how they should be receiving it…understanding the sweat equity and responsibility for using it well,” said Veasy.

Emily Millisap, Manager of Financial Planning at Avantax (a Vanilla customer), calls money “the last taboo.”

Millsap’s approach to financial planning places a high value on emotional intelligence and encourages challenging conversations between advisors and clients as well as clients and their own families.

“We talk about religion and politics – but not money. We teach our kids not to talk about it. They’re not supposed to talk about how much the car costs. They’re not supposed to talk to colleagues about how much they earn,” said Millsap.

Not only is avoiding money talk the norm, she explained, but the physical reminders of the importance of money and how it works, like parents sitting around the kitchen table balancing the checkbook, have all but disappeared.  

“Money has become more obscure, not less.” 

Millsap’s solution is to talk to your kids about money early and often and to touch on both the practical nuts and bolts of finances but also the emotions around money. She encourages parents to share their own stories around money because those stories touch on the emotional side of money.

In addition to family conversations, Westray Veasey encourages clients to bring their kids in to speak to the parents’ financial advisor so they can all talk through the estate plan at whatever level they’re comfortable with. Millsap also recommends advisors taking on the second generation as a part of the parents’ family before they might be eligible themselves, for instance, helping a kid out of college set up their first IRA. 

A more thoughtful approach to crafting your estate plan

If you’re concerned about the negative impact passing your assets down to your kids will have, there’s another option…don’t do it. Or at least, don’t pass it all down reflexively. If you have causes that are important to you, consider giving to them.

Steve Lockshin, Vanilla co-founder, has seen the negative effects of passing too much money to kids without guardrails many times and doesn’t always think it’s the best thing to do if you want to see your kids achieve their full potential.

“Think of it [the assets] like a gun. You could give your kid a gun and say, ‘Okay, do your best not to shoot yourself or your friends;’ or you could just not give your kid the gun at all. No rule says if you have $500 million, you have to pass all of it down to your kids, per stirpes.”

One approach Lockshin has seen work well is to provide more structure around how assets are passed down to kids. For instance, parents might say, I want to provide for my children’s education and healthcare and ensure they have a roof over their heads. And maybe they want to encourage entrepreneurship as well. A trust can then be created around those boundaries, providing fully for education and healthcare with an allotment for housing. The trust could set up parameters around entrepreneurship as well, for example, stipulating the requirement of a business plan and pitch, evaluated by the trustee.

When estate planning goes awry

All the experts I spoke to had examples to share of inheritance that hadn’t gone well – and common themes emerged here, too.

Millsap called to mind a time when the beneficiary had known substance abuse and money management issues, but instead of confronting those and dealing with them head-on through the way the estate was structured, the clients chose to ignore the issues, hoping they would resolve on their own.

“Clients worry that it [making adjustments to how money is handed down to a child] feels punitive – like a penalty. They don’t want their last thought to be that I kept the money away from them,” said Millsap

So, how can you get beyond this dread?

Millsap encourages her clients to visualize the consequences: “Say we don’t put any of the protections in place. What’s the outcome?” she asks. “Well, they’re going to get their dream car, then vacation, then… We add it up and we can see the real dollars ratchet down.”

Then she proposes some safeguards, such as splitting the bequest into thirds, releasing at, for instance, 30, 35 and 40. This way, even if the child splurges at the first tranche, they’re more likely to deal with the second and third more maturely. 

Case study: A picture of estate planning done right

When I asked Millsap for an example of an estate planning strategy done right, she mentioned a case of an ultra-high net worth family that employed a simple tool, which Steve Lockshin of Vanilla also speaks frequently about: letters of wishes.

“They attached a letter to the trust. It said, remember where you came from. This [inheritance] could change your life, but it could also do a lot of good in the world. Help the community.”

Millsap says this creates an emotional connection to the inheritance and a sense of a bigger family mission.

The right team to give you guidance

When it comes to how much to leave kids – and how to leave it – there’s a lot to consider. Regardless of your personal philosophy on money and inheritance, you’ll be doing both yourself and your kids a huge service by assembling the right team to help you create the strategy. That means engaging with a financial advisor who takes a holistic approach to finance and estate planning, going beyond investment strategy to provide expertise on tax and legacy planning. And that financial planner needs to work with an estate attorney who can add additional legal expertise and craft the documents to put your desired strategy into action. 

Finally, employing a tool like Vanilla will not only enable you to better visualize the complexities of your estate plan but help you have a conversation with your kids about what that plan looks like and how you hope they will treat their inheritance.

The information provided here does not, and is not intended to, constitute legal advice or tax advice; it is provided for general informational purposes only. This information may not be updated or reflect changes in law. Please consult with your financial advisor or estate attorney who can advise as to whether the information contained herein is applicable or appropriate to your particular situation.

Ready to get started?

Deliver a whole new client conversation experience

Talk to our sales team today.