Trust babies show awful truth of easy money

Family trusts can be heaven or hell for all concerned ...here’s how to do it right.

Wouldn’t it be great if we didn’t have to work and lived off a never-ending river of family money from a bottomless family trust? Surprisingly, that type of life isn’t always all it’s cracked up to be.

In fact, we need look no further than celebrity chef Nigella Lawson for advice on this front: Her father Nigel was chancellor of the exchequer (treasurer) in the Thatcher era and later a highly paid bank consultant.

Yet to hear his daughter tell it, family trust money was a negative. “It ruins people not having to earn money,” she says.

I see examples every day of family trusts that were set up in the 70s and 80s by parents with the best intentions in mind to secure their children’s financial future.

Fast forward to today and many of those children (now in their 30s and 40s) live a semi-cushioned life where they get enough distributions of income from the family trust to comfortably fund their existence.

The plain truth is they almost struggle to fill their days around Toorak in Melbourne, Killara in Sydney or Peppermint Grove in Perth, and have a severe lack of initiative, motivation and passion that the desire to generate money usually brings.

Surprisingly, the origins of this money is not from mega-rich family empires, these were middle to upper-middle class parents that worked hard, paid off their homes then purchased property for their children while also accumulating money. More often than not these parents used a family trust: in retrospect those trusts were used the wrong way.

Buffett’s rules

The world’s greatest living investor, Warren Buffett, summed up the delicate balance nicely when he said “a very rich person should leave his kids enough to do anything but not enough to do nothing”. There is also a reason why Bill Gates is reported to only have provisioned $US10 million to each of his children of his $US76 billion net wealth.

So when thinking about how to structure family wealth and inheritances, this is how it should be done.

Family trusts are commonly known for their asset protection and taxation benefits. They are also fantastic vehicles for managing the intergenerational transfer of wealth. Parents contribute money into family trusts and purchase investments, which over time grow in value. As the children grow up, the parents give them parcels of money either as lump sums or as regular income streams. When the parents pass away, the adult children take over running the family trust with the goal to keep building the wealth for their children. The whole cycle then starts over again, but importantly the wealth stays in the family.

The problem with this model is that when the children grow up and are given the keys to the family wealth, it can have the effect of dissipating a lot of desire that working people have and can throw up other issues such as self doubt and poor life choices.

By all means provide for your children, but do it in a way that causes the family wealth to influence in a positive manner and minimise downside risks.

Explore these options

Here’s the best blend of family trust planning options to avoid trust fund babies:

• Specify expenses and limits that family money can be used for. Examples include private school education, university fees, car purchase, home purchase, cash to help after having a baby and business set-up costs;

• Provision for a professional trustee to take over after your passing rather than give your children control of the family trust and its full assets;

• Set up a separate trust for each child for equality and transparency;

• Only hand the keys of the trust to your children after they reach a specific age, such as 40 or whenever you assume they would be mature enough to take on such responsibility;

• Release family trust money to your children at staggered intervals such as a portion at age 20, another at age 25 and a final payment at age 30;

• Alternatively, release family trust money at the retirement age of your children so they are forced to work and have careers but are safeguarded financially with money in their later years;

• Incentivise by providing family trust money on a results basis. Money is released upon certain triggers such as attaining a certain score in the HSC, graduating university or devoting years to a charitable organisation;

• Invest the family trust money into a business that cannot be sold (rather than property and share investments) so that the children have a vested interest to work and preserve the family wealth;

• For the few with significant family wealth, divert a portion to a philanthropic foundation to be controlled by your children;

• Before handing control of the family trust to your children after your passing, provision for life and business coaches, in addition to tax and financial advisory services, to help your children have the right mindset, morally and financially, to take the reins.

Money can buy a lot of things but you can only drive one car at a time, only live in one house at a time and only eat one meal at a time, so at some stage the effect of money can wear off.

Having access to significant unearned money can be a curse, so consider whether your family trust is leaving your children a dynasty or a lifetime of problems, and look to employ strategies to ensure it is the former, rather than the latter.

James Gerrard is the principal and director of independently owned Sydney financial planning firm FinancialAdvisor.com.au