In over 20 years of working with people of means, I’ve seen good results and I’ve seen bad. No surprise there. What does surprise me, however, is the lack of interest that many quality advisors have in identifying and avoiding the root causes of the bad results.
One such “bad result” that is particularly persistent is the trust fund baby problem. Most wealthy clients have a handful or two or six of examples they can recite with firm convictions that that is not what they want for their children or grandchildren. So if the desire for the good result (or at least avoiding the bad result) is so strong, why do we keep accumulating Trustafarians?
Without any naiveté that there is only one cause, it seems to me that a common factor is the lack of accountability for the beneficiaries that would be characterized as trust fund babies. Often this absence of accountability traces back to youth, but certainly can be seen in the disconnect between beneficial enjoyment of inherited or gifted property and the attendant responsibilities of managing such property. The sheer volume of an inheritance can create an unaccountable dynamic (if there’s simply too much to spend in a lifetime for a beneficiary, the beneficiary effectively may have a lifetime without any meaningful financial consequences), but the divorce of beneficial enjoyment and management responsibility can lead to stunted financial maturity, and therefore lead to a trust fund baby.
Assuming that’s true, at least in part, what is to be done? I have several thoughts for your consideration:
- Create financial responsibilities for children as young as 8 – 10 years of age — and do not waste the opportunities for learning accountability by serving as a backstop for overspending or mismanagement of funds placed in a child’s hands.
- Celebrate a beneficiary’s financial successes.
- If you aren’t comfortable with a beneficiary’s ability to manage their likely inheritance, do an intake as to why not and strategize how to overcome perceived shortcomings.
- If financial mentoring is not complete, consider whether your estate plan includes a platform for such mentoring. And when it comes to mentoring, rely on people and not on institutions.
- Don’t mistake financial knowledge for financial maturity. The former can be gleaned from books, seminars and fireside chats with mom or dad. Financial maturity, on the other hand, comes from experience, failure, proper modeling, and fireside chats with mom or dad.
- Make sure you’re not insisting on “your way.” Allow your beneficiaries to explore and further their own financial maturity.
What might you add (or subtract) from the list above?