You have done well in life and have a lot of assets. In your estate plan, you created trusts for your kids, but you are not sure how to talk about it with them. Do not worry, you are not alone. Many wealthy families avoid discussing trusts with their kids because they do not know how to approach the subject. This article will help you plan the conversation about trusts with your kids.
Do not Wait Too Long
By their late teens or early 20s, you should be talking to your kids about their trusts. Do not wait too long. By letting them know earlier as opposed to later, you are preparing them for the responsibilities that come with inheriting wealth. The sooner you can start educating them, the better. Small doses over time are better than intensive immersion all at once. You are better off educating them over time than never telling them and having them find out once you have passed away. Do your best to prepare them while you are still alive and they are still young.
Keep it Simple
Avoid a bunch of technical talk when speaking to your kids about their trusts. Do not use acronyms, legal or financial jargon. You are likely to confuse them with this type of language, and they could easily tune out of the conversation.
Explain The Responsibility of Wealth
If your kids will or might have access to their trusts at any point in their 20s or 30s, you need to educate them beforehand on the responsibilities that come with inheriting a large sum of money. Analogies can help here. Tell them stories of young sports professionals, celebrities and lottery winners who make millions of dollars and then end up bankrupt. Ask them why they think that happens so frequently? Explain to them that staying wealthy is a skill. Staying wealthy is also a different skill set than creating wealth. Teach them the difference between wealth creation and wealth preservation. Let them know that when you inherit a large sum of money, you only get one chance, and you must get it right the first time. There are no second chances if you lose your inherited fortune. Educate them about risk tolerance, diversification, and sustainable spending rates so they stay wealthy and do not blow their money.
Great Trust Beneficiaries are Developed
Most people planning their estate focus far too much on how to distribute money to their beneficiaries. A better approach is to raise great beneficiaries! You will get more satisfaction by grooming your kids to be good stewards of the family wealth than you will from producing a trust document that protects them when you are gone. Teaching your kids about money and how to manage money will protect them far more than any trust document.
Have an Annual Family Meeting
An annual family state of the union is a great way to introduce your estate plan to your kids and keep the conversation going. If you want to make it interesting, prepare a slide show. Talk about the trips you took during the year or other memorable activities. Take an inventory of your core family values and where they came from. Develop a family mission statement. Discuss charitable and philanthropic goals you may have. Make it fun and do not get bogged down by just discussing the money.
Do not Overwhelm Them
Trusts can be intimidating for many people. Just knowing you have a trust can affect a person’s view of themselves. There is a stigma attached to being a trust fund recipient. The words privileged and spoiled are often associated with trust beneficiaries. When you start talking to your kids about their trusts, do not pile a bunch of information on them at once. Keep the conversation light and introduce the topic in small bites over time. Provide enough information to engage their curiosity but not so much that you turn them off.
Explain Why You Created Their Trust
Did you create trusts to protect your kids from divorce? Is your kid bad with money? Have a drug problem? Whatever the reason, you need to explain to your kids why you created their trust. Do not leave them in the dark. Be honest and transparent. If they understand your motivation and know what to expect, they are more likely to succeed as a trust beneficiary.
Explain The Trustee’s Role and Why You Chose Them
Will your kid be the trustee of their own trust? Do you have a corporate trustee? Maybe an aunt or an uncle is the trustee? Make sure you explain who the trustee is and why you chose the trustee. You want your kids to be comfortable with your trustee selection.
Divide Family Heirlooms Now vs Later
Who gets grandma’s wedding ring? Dad’s golf clubs, ties, guns, or collector’s items? What about mom’s jewelry? Create a tangible personal property memorandum and attach it to your trust document. Reference the memorandum in your trust. The memorandum will specify which heirlooms your children will receive. Conducting this exercise while you are alive and explaining it to your kids prevents fighting after you pass away.
What Not to Do
Do not just avoid the topic entirely. If you never talk to your kids about their trusts while you are alive and they only learn about them after you are gone, they will have a lot of unanswered questions. They will never get the answers. Additionally, they will have a steep learning curve as they adjust to being a trust beneficiary while at the same time mourning your death. You are far better off telling them about their trusts than keeping them in the dark.
Conclusion
Trust planning is an effective way to safeguard the family wealth. Do not wait until it is too late to educate your kids about their trusts. Teach your kids about money and develop their financial skills. Great beneficiaries are raised over time. If you keep the conversation light and do not overwhelm them, your kids are more likely to take an interest in their trust planning and become a great beneficiary.
Ethan S. Braid, CFA
President
HighPass Asset Management
Denver, CO