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How to Avoid the “Trust Fund Baby”

From the outside, it looked like they had it all: three great kids doing very well in school, a business headed for the stratosphere, a beautiful home, a large stock portfolio, great family vacations and lots of toys. But, something was missing and they were deeply troubled. You might be asking yourself, what could be the problem with a family so financially secure? After all, they have set aside money for college, executed will and trusts, and had substantial amounts of life insurance. Their concern focused on their children’s ability to handle the money that would someday become theirs.

Sound familiar? This theme plays itself out more often today than ever before, primarily due to the tremendous amount of wealth that has been created over the last 20 years. And you know, you have a right to be concerned. Too often, the financial free ride of a hefty inheritance can create “trust fund babies” – heirs who find this easy money a ticket to sloth and self-indulgence. The missing ingredient is a healthy dose of what I call Financial Parenting.

Just what is Financial Parenting? It’s the process of educating children and grandchildren about responsibilities – both financial and social – that come with money. Yet too often, it’s exactly these “financial facts of life” that financially successful parents fail to communicate to their children. The lack of communication can be attributed to many things. It could be the result of a geographic separation amongst family members or old-fashioned privacy concerns. Sometimes parents just don’t know how to get started and other parents can’t or just don’t make the time to communicate with their kids.

Financial Parenting isn’t easy, but here are several simple yet creative ideas that you can suggest:

An Allowance with Strings

Begin educating children and grandchildren about financial matters early. Start by reflecting on your value system and what’s important about money to you. You’ll probably find that your value system falls into three categories: spending money, saving money and giving back to the community.

As soon as a child is old enough to understand money as a reward (usually about age 5), you might establish a regular weekly allowance. Note that some people like to tie the allowance to family chores while others believe that the chores are an independent responsibility that should not be tied to any allowance.

Help the child understand that they have the same responsibilities that you have with your money. Suggest that the child save some, spend some and give some back to the community. When they give something back to the community, remember to consider their interests.

THE REAL-LIFE LESSON: By managing money, children begin to understand how to balance savings, social awareness, and just plain having fun.

Build Business Smarts

Consider employing older children in the office or family business after school and/or during summer vacation. Simple activities such as answering the phone and greeting customers build social polish, while working in the warehouse or matching invoices with purchase orders helps to develop organizational skills. And remember; instruct your employees that they are to receive no special treatment just because they are your kids.

THE REAL-LIFE LESSON: Children get an up-close and personal look at how businesses function, and they have a chance to develop confidence and self-esteem from mastering basic business skills.

Stretch Social Consciousness

Get children and grandchildren involved in charitable activities or volunteer work to boost social awareness. A word of caution to parents, make certain that the activity is something the children themselves are truly passionate about. You’ve got to get them engaged so find out what’s important to them!

The local performing arts may or may not be a good idea; it depends upon their interests. If they like animals consider having them volunteer at the local animal shelter, if they are into sports, consider donating money or old uniforms to help underprivileged kids. If they are good academically, consider tutoring children who are less fortunate. And obviously, don’t forget your local church or synagogue. The more kids enjoy the activity, the more excited they will be about participating.

Consider establishing a family-run charitable foundation, with children and/or grandchildren participating in the distribution decisions. Think the grandchildren are too young? I have a client who established a Grandchildren Board of Directors on which the youngest is 5 years old. It really works!

THE REAL-LIFE LESSON: Caring means sharing. Children who connect from their heart at an early age with a particular cause or activity will carry that passion with them for life.

Consider Establishing a Family Income Trust

Instead of an outright bequest of your estate, consider endowing an irrevocable Family Income Trust as a way to motivate and encourage – rather than simply support – a multigenerational line of heirs. The power of this type of trust lies in its ability to encourage positive, productive behavior through discretionary distributions made by the trustee, guided by criteria established by the client when the trust is created.

Family Income Trust provisions may direct the trustee to distribute matching funds to double a family member’s savings for college education, or to reward heirs who maintain a certain grade point average in high school or college with a cash award. In addition, prizes could be given to recognize outstanding contributions by family members in the areas of law, medicine, charitable activities, or the arts.

THE REAL-LIFE LESSON: A Family Income Trust can encourage the heirs to maintain a certain value system and reward individual achievements by family members.

Weighing Your Options

It is beyond the scope of this article to address all Financial Parenting opportunities and there is, of course, no single “right way” to develop financial or social acumen in children. And as with any teaching tool, Financial Parenting requires sensitivity to the needs and personalities of each family member. The key is to focus on your value system and address Financial Parenting issues early in the planning process.

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