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How to Raise Successful Children of Wealth

April 27, 2022

There are numerous stories of wealthy families that over the generations became poorer rather than richer. Overspending and poor financial decisions by the Pulitzer’s, Barbara Hutton (Woolworth heiress) and others resulted in the loss of much of the family fortune. Why does this happen when these families had every opportunity to succeed? As noted by Andrew Carnegie in his book, the Advantages of Poverty, giving a substantial inheritance to the next generation could be a disservice to them, incentivizing them not to work. He felt that a child born in poverty takes nothing for granted and expects nothing he does not himself earn. He learns discipline and the value of work. Many of our clients are concerned about this issue as well and want to know how to raise successful children of wealth who don’t rely on their inheritance to support them. We counsel them about how they can provide for their children’s needs while also encouraging them to live productive lives.

The key estate planning strategy to control access to wealth for the next generation and beyond is to use trusts. A trust not only allows the grantor to decide how and when a beneficiary can receive money but it protects assets from creditors. If a beneficiary cannot compel a distribution from the trust, then creditors cannot seize the money to pay the beneficiary’s debts. Further, trusts also safeguard assets from the beneficiary’s spouse in the event of divorce. If a beneficiary is disabled and has special needs, a trust can ensure that they can still qualify for government benefits.

In designing a trust that will incentivize children to learn the value of work and contribute to society, we recommend considering some of the following:

Do not guarantee distributions

If a beneficiary knows they will receive money at a given time, then they only need to support themselves long enough to get to that moment. Our clients typically want their children to develop a lifelong work ethic, not just consider employment as a temporary measure until they get their payout. 

Make distributions for specific reasons only

A good solution for many families is to provide that distributions can only be made for the beneficiary’s health, education, maintenance, and support. In this way, parents can ensure that their children’s basic needs are met and they have the tools to succeed, but they are still responsible for earning a living and are required to pay for their own vacations, luxuries, etc.

Name a trust protector

A trustee is responsible for administering the trust and making payouts. However, a trust protector is neither a fiduciary nor a beneficiary and their job is limited to being able to add or remove beneficiaries of the trust. The benefit here is that it discourages beneficiaries from suing to compel a distribution. The trust protector can threaten to remove the beneficiary from the trust because they sued. The point is to make sure that the beneficiary doesn’t see a lawsuit as a way to get money rather than working.

Provide a letter of instruction to the trustee

In addition to the language in the trust, the grantor can give the trustee guidance on their wishes about how and when distributions should be made. For example, if the trust provides that the trustee has full discretion to make distributions, the letter can give examples of the types of situations that the grantor would approve of, such as providing money to start a new business, pursue additional education, or supplement the income of a child who chooses to work in public service or who has many children. The letter is not directly binding on the trustee, however, if the trustee makes a decision that complies with the letter, a court is likely to see it as justified in the event of a lawsuit.

These are a few examples but others may apply depending on the circumstances. The key point is to make clear to children that they are not entitled to their parents’ money and they must build productive lives on their own first. In this way, families can help ensure that their wealth continues to grow with each generation. Of course, a trust only goes so far. Those values also must be taught from childhood, but the right legal arrangements can help reinforce those values.

If you have children and/or grandchildren and want an evaluation of the best way to protect family wealth, contact us for a consultation.


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