When You Definitely Need a Trust, Part 3: Protecting Your Heirs Against Their Own Youthful Foolishness

Most lottery winners have nothing to show for it 12 months after winning. The statistics for inheritance are depressingly similar. True, a larger inheritance (or jackpot) tends to take longer to spend. But for the most part, such windfalls do not solve “the money problem” permanently. 

Leaving money to your kids via a will (without a trust) does not give you much control over when they receive the money and how they spend it. Now, this article is not exactly for people in their 90s. By this point, your kids are probably in their 60s or 70s. They have probably learned everything about money that they are ever going to. 

But if you’ve got kids (or especially grandkids) to whom you’d like to leave an inheritance, there are a few situations where it makes sense to have some guardrails. 

Most 20-somethings do not handle large windfalls well. I include my past self in that. While I would have argued with you at the time, I think I was blind to a few behaviors and situations that were costing me far more than I knew. 

One, I wasn’t very motivated. I was depressed and aimless (particularly from 24-27, before I started my business). A large windfall would likely have short-circuited what little drive I had to acquire skills and make myself useful to the world. It is not generous to rob your kids and grandkids of the need to make something of themselves. 

Two, I wasn’t as good with money as I thought I was. I was ultra-frugal, but I was an awful investor. I traded frequently, took too much risk, and earned really mediocre returns that lagged the market by a wide margin. I didn’t realize that investing is a skill that takes time to learn, I just thought I would be amazing at it from the get-go. I don’t think my experience was unusual. Many of my peers, and many 20-somethings today suffer from the same hubris. 

Three, I was in a relationship that wasn’t working. Dumping a big pile of money into that situation would not have made things better. It might have anaesthetized certain problems, allowed us to paper over deeper issues, but it would not have led me, nor her to a better life. 

Four, I had very little money. While I wasn’t stressed about this on a day-to-day basis, it did mean I failed to pursue experiences that might have made my life a lot better. That might have looked like weekend trips with friends, more travel, or going out to eat once in a while. I felt like I didn’t have enough money to support a social life. 

None of this is for the sole sake of self-flagellation. I believe I was (and am) a good kid with a good heart, trying my best. Your kids and grandkids are probably in a similar situation. It’s just that in your 20s you don’t know which way is up. You simply don’t have much life experience to draw on. You want to experiment, and try things. 

What lessons can we apply from my youthful stumblings? 

1. You want to provide fuel for your kids and grandkids to live fully and grow into the best version of themselves. You can put stipulations in a trust that say, “this is only to be used for education (or travel, or a home purchase), at least until a particular age.” You can also put in certain performance-based clauses like, “$20,000 becomes available upon completion of a Bachelor’s degree,” or “ no distributions shall be made for 24 months if the beneficiary is using recreational drugs.” This money should enhance their lives, not fund an escape from it. 

2. Everyone starts out unskilled at investing. It’s better to learn and make mistakes with a small sum, rather than screwing up your whole inheritance with a few dumb decisions. Shield your heirs’ assets from their learning curve by having those assets professionally managed, preferably with some broad instructions like, “the portfolio should be invested 80% in equities, split between broad-based index funds at the manager’s discretion.” 

3. You can make funds available for couple’s counseling, or any other medical expenses for that matter. But at the same time you want to protect those assets from divorce, break-up, and other calamities. As I’ve mentioned elsewhere in this blog, you can put a pre-nup clause in place, saying no distributions shall be made if the beneficiary marries without a valid pre-nup in which the spouse disclaims all rights to these assets. 

4. I know I’m outlining a lot of worst-case scenarios, in which receiving “free money” can make life worse. But ultimately, I think the dose makes the poison. Will $10,000 ruin your grandkid’s life or will it give them a buffer against disaster? Will $50,000 help them start a small business, or get an education they otherwise wouldn’t have? Does $15,000 allow them to see more of the world (and learn about themselves along the way)? Doling out money in small increments can maximize learning and growth, while avoiding the worst of the drawbacks. With time, your heirs may become wiser and better stewards of the money, until such time as all the guardrails eventually come off. And heck, if you feel good about helping them in this way, you can even start giving money to them while you're still alive to see the difference it makes, while it still makes the biggest difference to them. It might even benefit them to have a guiding hand in using this money.