Introduction: Ron inherited $1.5 million
from his parents two years ago. He was an only child. At 25 he
thought he thought he was on easy street. After all, he told
himself, I’m a college graduate and have a good job as a parts
manager at an auto dealership. Things were fine, for about 3 months.
Then he invested with Harold. He had known Harold for about a year.
Harold was a little bit older and seemed pretty successful as a real
estate broker. So when Harold described the land development deal
that he had going and that Ron could double his money, Ron was
interested. But he knew he shouldn’t put all his eggs in one basket,
so he decided to invest $500,000 in the land deal.
His money was pretty safe with Harold, after all, the real estate
market had already hit the skids 2 years earlier. So when his girl
friend, Wendy, introduced Ron to her friend, Eva, Ron didn’t have
his guard up about the investments that Eva was pitching as a stock
broker. Ron invested the rest with her.
Two years later the $500,000 and Harold can’t be found. The $1
million Ron invested with Eva is now $300,000. The loss wasn’t all
because the companies Ron invested in lost money, a lot of the loss
was because Eva kept churning the account to generate more
commission for herself.
The Problem: Just so you know, Ron,
Harold, Wendy, and Eva are fictional, sort of! They are actually a
conglomeration of people and families I have worked with over the
years. The point is that it is as difficult, maybe more difficult to
hang onto the money than it is to acquire it in the first place.
Why? Because at every twist and turn there is someone who wants to
get you to invest with them or in their latest plan. And college
educated or not, if you haven’t been through the ringer once or
twice, you are the mark.
In my experience I have seen this process play out over and over
again. In several situations, all of the money was lost. This
occurs, possibly, because a child in his 20's and 30's believes he
knows it all. Now he inherits what appears to him to be a massive
amount of money. Why were his parents so conservative, he thinks,
after all, this taking care of money is easy. So he goes out and
invests but fails to take into account all of the risks and
problems. And then, of course, a few years later it is all gone.
Interestingly, as I think back on the situations I have seen, it is
almost always a male child who is involved. Although I ‘m sure it
happens, I can’t actually recall this ever occurring to a daughter.
Long Term Trusts as
the Solution: To avoid this risk, I advise my clients to leave the
inheritance to their children, no matter how responsible the child
may be, in the form of long term trusts. Obviously, if the amount to
be received in the inheritance is small, then this approach is not
viable. But if the child or individual children are receiving more
than maybe $350,000 (individually, not in the aggregate), I think it
makes sense. Long term trusts have so many advantages. Lawsuit
protection, divorce protection, and someone else to help manage it.
The latter is our focus in this article.
So how do we do this. Often times we will advise that a trust
company be the manager for the first five years, then the child can
be a co-manager with the trust company for five years, and after
that the child can be the sole manager if he or she desires. This
process, particularly the middle interval, gives the child the
ability to phase in as manager and “learn the ropes” by working with
the trust company. In my mind, this is a much better approach than
having it all dumped on the child and expect that somehow, someway,
he will simply become financially wise, instantaneously.