Estate Planning: Adult Children and Money Part II

Jon J. Gallo

This month's Money and Soul column discusses the need for financial advisors to be proactive and psychologically aware when working with clients whose adult children are exhibiting extended economic dependency. This column examines two areas B estate planning and credit cards B where the financial advisor's expertise can become a valuable tool in helping clients avoid the problem of financially dependent adult children. Far too few financial advisors think of posturing themselves as resources who can be used to educate their clients' children in the appropriate management of family money. This is a shame, since doing so provides the clients with a capability they lack B both anecdotal experience and formal studies demonstrate that it is often easier for children to learn from outsiders than from parents B while enhancing the likelihood of long term client retention.

All of us who work with affluent families can tell horror stories of millions of dollars in trust funds being dissipated by 25 or 30 year olds as fast as they receive it. In almost all cases, these children never received training in money management. As Eileen and I point out in our book, Silver Spoon Kids: How Successful Parents Raise Responsible Children (McGraw-Hill, 2002), many children growing up in affluent homes have this notion that money grows on trees; that they have so much that they'll never run out of it and if they do, they can magically grow some more. As a result, they are incapable of exercising restraint when they receive the money from a trust. In our opinion, the biggest error parents commit when creating trusts for children does not involve running afoul of the Internal Revenue Code; rather it is failing to structure them in such a manner that they provide an opportunity for their children to learn money management. In this process, the financial advisor can play a major role.

Psychologically, trusts created for children are meaningful to them in ways that other money subjects are not. After all, it's their money that's in trust, and a 15-year-old is likely to pay much more attention to a discussion of his trust than he is to an abstract discussion of family money and investments.

Here are four ways that will help your client turn a trust for his or her children into an educational money management vehicle long before the children actually start receiving trust distributions. To take advantage of this approach, a distinction should be made between a Trustee's duties to manage assets (the administrative function of the Trustee) and the Trustee's discretion over distributions of income and principle (the distributive function of the Trustee.) This distinction will permit the children to become Administrative Co-Trustees who may participate in management of trust assets, without giving them authority over distributions of income and principle, which can be vested exclusively in a Distributive