Incentivizing Your Trust Fund Kid

Incentivizing Your Trust Fund Kid

Trust Fund Kids

What do you think of when you hear the phrase “trust fund kid”? Your answer may not be a positive one. The popular stereotype lets us believe trust fund kids are over-privileged, spoiled, and never learn the value of work. Nevertheless, if your desire is to leave an inheritance benefitting your child, a trust fund may be the best choice. That does not mean, however, that your child should receive wealth without having responsibilities or learning its value. Rather, a thoughtfully constructed trust can incentivize your child, allowing him/her to be productive and have a meaningful life with the benefit of inherited wealth, avoiding the stereotype altogether.

A trust fund is simply the collection of assets held in trust for someone, and trusts have many advantages over simple wills for passing wealth to one’s child. Wills direct the distribution of your assets upon death and are subject to probate, which provides court supervision over the collection and distribution of assets. A trust becomes valid upon execution and can hold a wide variety of assets during your lifetime that an administrator will distribute according to the trust’s terms following your death. Properly executed trusts will avoid probate as well as avoiding or minimizing gift and estate taxes. Establishing a trust can also help you ensure a child’s inheritance is managed properly, that a business is kept in the family through generations, that assets are protected in the event of a divorce, and that privacy is maintained, since trusts are not public records.

When establishing a trust, there also are ways to restrict distributions to help motivate that child in productive ways: your trust might require beneficiaries to graduate from college (or an equivalent) or to maintain a specified grade point average to receive trust funds. You might even require a beneficiary be employed or engage in charity work to receive distributions. Conversely, beneficiaries can be cut off, or have distributions reduced, if criteria of your choosing are not met.

In designing an incentive trust for your child, it is important to think broadly and talk through considerations with a qualified advisor. If you have several children, they may have very different personalities or have very different needs as adults. To achieve the result that best suits your goals and desires, it is important to balance potential future blessings and problems—things like one child’s personal financial success, a potential medical emergency, financial hardships, different balances in life-work situations, etc., that can affect the trust’s stipulations and require adjustments to trust distributions. When done correctly, setting up your child to be a trust fund kid can be a wonderful way to give him/her security while he/she fulfills his/her potential in a meaningful way.

If you want to discover how a trust can work for you in passing wealth while incentivizing your child(ren), please contact Kling Law Offices for your free consultation. We would be happy to work with you in designing the right incentive trust for you and your trust fund kid.