Planning for a Spendthrift Child

Parents who are worried that their child may be a spendthrift should not just hope for the best when creating a trust. Here are a few prudent planning tips to consider:

1. Parents should honestly assess their children’s financial judgment.

• Parents can do this by creating an investment firm and putting their children on the board to see how the children handle themselves.
• Parents can also include children in meetings with financial advisers.
• Parents might also consider a therapist to help the children deal with the psychological affects of inheriting great wealth.

2. Pick the right trustees.

• It is beneficial to have a corporate trustee and then a co-trustee who knows the beneficiary well, but is not too close to them.
• Corporate trustee will control the distribution of money, and the co-trustee can monitor and report on the beneficiary’s progress in improving his/her financial judgment.

3. Think about trust rules.

• Provide in the trust instrument for trustee to pay bills on behalf of the child.
• Use generic language in clauses that hold money back if a child is not behaving.
• Experts advise that parents avoid overly strict guidelines – clarify that the trust is not meant to be the sole means of support for a child in good health. 

See Jennifer Hoyt Cummings, When Your Child’s a Spendthrift, The Wall Street Journal, Sept. 19, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.