Inheritance, descendants and trust fund squandering

numbermassager's picture
Rank: King Kong | 1,433

This forum has a solid share of individuals enjoying varying levels of relative financial success. Obviously many are determined to a lot of 'I'm build a legacy for their kids and grandkids' grandkids'. But statistics show that wealth gets squandered by the third generation.

I was reading a comment on Twitter wherein the author set up a trust that leaves his kids and grandkids money each year equal to the amount they earn. Aka if you earn $30,000, you get to pull $30,000 from the trust, $100,000, pull a $100,000 etc.

Seems to be a good way to ensure future generations will inherit a work ethic. What do you think? Does anyone have some horror stories of wealth being squandered by heirs? Or positive stories of heirs fructifying the family fortune

Comments (85)

Feb 11, 2020

I'm thinking of bringing back primogeniture. 1st born son gets the business money, with stipulation that he should take care of other siblings. It's the only way to make the money last more than 4-5 generations, also means living well below your means so that kids don't think helicopter rides are normal.

Feb 11, 2020

That's actually pretty interesting. They would probably all dislike the first born though

Feb 11, 2020

They can get over it and earn there own money

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Feb 12, 2020

My family actually tried primogeniture. Ended up being a massive failure in the second generation itself after the eldest uncle squandered all of the wealth, then began falsifying records. Now he's on the verge of bankruptcy, while everyone else is doing fine - the estate's lost though.

On the other hand, the maternal line in the family has done well by continuing to pass the hands of the business through children after a long apprenticeship.

I believe the key here is to have a defacto trust fund if things go south - in the second example, it was the elders and those actively involved in the business who played that role. Also a very strong ethic of frugality and living humble - which was lacking in the first example, and still going strong in the second.

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

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Funniest
Feb 12, 2020
My Name is Jeff:

My family actually tried primogeniture.

This sounds New England as fuck

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Feb 12, 2020

So the rest of your uncles did fine despite the lack of inheritance?

Feb 12, 2020

What if the younger sons are more capable than the eldest?

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Feb 12, 2020

Trial by combat?

Maybe, just like Succession, the ones who want to run the company get it?

Feb 12, 2020

Historically speaking, depends on the moral fiber. Some do not resist the temptation and remove the incompetent. Others respect the wishes of the parent and remain on the sidelines.

Feb 12, 2020
C.R.E. Shervin:

I'm thinking of bringing back primogeniture. 1st born son gets the business money, with stipulation that he should take care of other siblings. It's the only way to make the money last more than 4-5 generations, also means living well below your means so that kids don't think helicopter rides are normal.

Unless your firstborn is an idiot. What if your second child is a business genius?

Nothing in our current code says you have to give anything to anyone. Just don't give your dumb kids money, if what you care about is wealth preservation. Put it in a trust they can't touch the principal of.

Feb 12, 2020

Hey, at "my" family office the CEO is the youngest, and in my opinion the most apt to handle the business.

And, while that is a great point, how do you deal with keeping all that cash in one place, which is the surest way to keep it. Just look at the English Kings

Feb 12, 2020

Bring back deadpools as well

Feb 12, 2020

or Tontines!

Feb 11, 2020

That's actually very interesting. I always thought I would love to not have my kids and grandkids worry about debt, but never really help them out in terms of income - i.e. they can have a reasonable car, attend college without student loans, and, if my wealth permits, a starter home or condo without a mortgage but they still need to go out and earn to put food on the table. Hopefully it gives them an easier life, but not a free ride if you will. The incredibly wealthy people I know have more or less followed this model with the second or third generation "kids" my age.

I think the hardest thing to teach though is ambition. All of the incredibly wealthy heirs I know (all 4, mind you, but it's still 4 for 4) are good people. They aren't on drugs, aren't little shits, etc. There is a wide range of ambition and competence though - some are out attacking life like they don't have a backstop while others are more than content to just get by in their careers because they don't need to do any more than that. They're happy to just "not screw it up," which is a bit sad to me, but to each their own.

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Feb 11, 2020

Interesting. Does your answer change depending on level of success you achieve though?
Your answer is very reasonable and is what most kids from upper middle class families (say a household income exceeding 200k outside of Tier 1 cities) can expect from their parents.

What if (strictly hypothetical- you might be in this tax bracket already) you have a net worth of 10+ MM (which is where the term "rich" can start to be bandied around regardless of location - in my humble opinion). Does your answer change?

How about in the 100+ mm? At that point it's practically impossible to just give them the trappings or upper middle class..

Feb 11, 2020

It most likely would (hard to say at this point with neither millions nor kids) although I would say that my upper middle class parents certainly didn't pay for my graduate studies or a house.

I think at some point it's all about scale. No, if you're worth $100MM you aren't going to be giving the same life to your kids as you would if you made $110,000 a year, but you also don't necessarily need to act like you're worth $100MM either.

I forget the wealthy person who I read makes his kids fly coach while he's up in first class because he tells them "I'm rich - you're not." Barring any jokes about someone who is rich flying commercial in the first place, I think distinctions like that are important.

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Feb 12, 2020

College without loans is quite the free ride these days in the US.

Ideally you want your kids to face the most basic challenges the average American does.

Feb 12, 2020
neink:

College without loans is quite the free ride these days in the US.

Ideally you want your kids to face the most basic challenges the average American does.

I know quite a number of people whose parents paid for their schooling. By and large, they aren't little cunts because of it, they just don't a comical amount of student loan debt like yours truly.

If there is one thing I wished someone would do for me, it would be pay off my student debt. (And unfortunately I'm nowhere near poor enough for ole Liz Warren to do that for me.) Thus, if there is one thing I do for my kids, it will be to make sure they don't have it.

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Feb 11, 2020

I will be donating 100% of my money.

If you are successful and can't teach your kids how to manage their money and make their own then that means you failed as a parent.

You really have to try to fuckup to make under 6 figures if your family is wealthy and functioning well lol

Feb 11, 2020

I see your point. There are a plethora of advantages, like access to networks, contacts etc..

I have the same question I asked CRE earlier though. Does your answer change based on your net worth?

Feb 11, 2020

Nope. A stable family and the absence of any major health problems pretty much guarantee you're in a position to live comfortably IMO.

Feb 11, 2020

No amount of value you save for your kids can compensate for the time you won't invest in teaching them good manners.

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Most Helpful
Feb 11, 2020

finally, a topic I'm educated on. @CRE" the guy who says "I'm rich, you're not" is jerry seinfeld

my experience is in those who are financially independent, not uber wealthy. think assets between 3-20mm, I have no experience in the uber wealthy. the horror stories are exactly what you'd expect, being taken advantage of, living high on the hog, it's the same as every sudden wealth story like that of athletes, lottery winners, etc., and I've noticed one thing and one thing only - legal documents only delay the inevitable.

with the exception of money going directly to charity, your beneficiaries will do what they're going to do. sure, you can tie it up in trust in the way you describe with all sorts of clauses, but either the kid is going to be responsible or they won't, and I think that has less to do with how the parents write their documents and more about how the parents raise their kids. it is possible to raise grounded children who will become successful. we deal with a family where there was no comprehensive planning to tie up the money, the heirs were a housewife married to a doctor and a state attorney with an equal amount of money saved from her efforts. we have another family where the patriarch was a bigwig at a company whose product is in everyone's house and was a decamillionaire, did lots of comprehensive complicated planning, and the kids even in their 60s are still worthless, and I could go on and on.

it's the struggle that makes kids good and grounded, but I'm not saying you have to make your kids fly coach, have bunkbeds when you have a 10,000 sqft house, stuff like that, I just think the parents that do it well have a constant awareness of what they're exposing their children to. sure, they go to good schools, but are the parents involved in their academic lives or are they absent? when the child fails, do the parents rush in and fix the problem with money or do they let the kid struggle for a bit?

you can use all sorts of legal techniques to prolong the life of an estate and save on taxes, ensure the money doesn't get taken via divorce/bankruptcy court, but beyond that, I think it's child rearing more than legal planning that makes a difference in the long term arc of a family's wealth.

Feb 11, 2020

This is fully true, but as you mentioned, you still need the legal planning or you will turn your kids into the proverbial lottery winner. Even the "best raised" 18 year old would not do well to have $15mm dumped on his lap if you croak dead on your ski trip.

tldr; trust planning is necessary but not sufficient

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Feb 11, 2020

yeah, nobody should get money until they are 30-and even then, it should be tiered

Feb 12, 2020

fair point, an otherwise well-raised child can be spoiled with improper planning, but in my experience that's rarer than anyone would like to believe

my goal was to address the opposite, that thoughtful planning can make up for shitty parenting. it cannot

Feb 11, 2020

Great answer as per usual. I remember seeing a post by you of someone who willfully ignored your advice and squandered all their inheritance.
Thank you

Feb 12, 2020

if I had a nickel for everytime someone on WSO ignored my advice, I wouldn't work for a big company, I'd run my own family office

Feb 12, 2020

Short answer: if you raise entitled brats they will grow up to be entitled brats no matter what you do legally.

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Feb 12, 2020

In other words, raise your kids well and hope for the best.

People are people, there is no way to stop a cocaine addict heir from blowing all that money on coke, except to raise him/her in such a way that they don't turn to drugs in the first place. Which obviously isn't foolproof either

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Feb 12, 2020

the key to not having your son blow your money on coke is to blow your own money on coke and have him blow you in exchange for said blow

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Feb 11, 2020

The best way is to make sure you raised your kids correctly.

That being said, I think it's better to set guidelines on behavior instead of as a function of salary. Trustees can be guided to assess a beneficiary's moral character, as evidenced by e.g. lack of drug and alcohol abuse, being gainfully employed, a history of charitable conduct, etc. and set assistance accordingly. Also, a lot of people set it up to unlock tiers by age (like vesting) or event-driven (such as support for housing).

Feb 12, 2020

I don't think I'll ever make enough money to truly worry about this, but I plan on setting my grandkids and not my kids up. Pretty much ensure that the grandkids can avoid living in squallor until they're adults

Feb 12, 2020
Romain-Mar:

I don't think I'll ever make enough money to truly worry about this, but I plan on setting my grandkids and not my kids up. Pretty much ensure that the grandkids can avoid living in squallor until they're adults

That's what my grandmother did. Put away $30k for each of the 3 grandkids in the early 90s. Couldn't touch it until I turned 25, it's worth a bit over $250k now.

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Feb 12, 2020

No matter how well my career goes from here, my kids will attend public school.

Unless they get a scholarship, or into an elite top 15 college, they will attend a public college (or be removed from the inheritance because I ain't paying Fordham $200k)

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Feb 12, 2020
amonkey_1:

No matter how well my career goes from here, my kids will attend public school.

I wish I could take a stance like that, but in my city it's a bit more complicated. There are some good public schools, but they are few and far in between and aren't necessarily located where I want to live.

Feb 12, 2020
CRE:
amonkey_1:

No matter how well my career goes from here, my kids will attend public school.

I wish I could take a stance like that, but in my city it's a bit more complicated. There are some good public schools, but they are few and far in between and aren't necessarily located where I want to live.

Which city?

I work in NYC; grew up on Long Island. Likely would settle down and buy a house there or another affluent suburb.

Feb 13, 2020

Yeah with public school you have to live in a nice zip code unless school choice is acceptable in the district. Otherwise private school is the way to go.

Greed is Good!

Feb 12, 2020
amonkey_1:

No matter how well my career goes from here, my kids will attend public school.

Unless they get a scholarship, or into an elite top 15 college, they will attend a public college (or be removed from the inheritance because I ain't paying Fordham $200k)

If I have the money you best believe my kid is going to private school. As for college, if the kid gets into an elite school I'll do my best to pay for it. If not, let them take loans/get scholarship like I did. As far as public unis, yea I don't see any reason to pay out of state tuition for UVA (for example) when I can pay in-state tuition for UT. Only way it makes sense is if the in-state public school is shit.

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Feb 12, 2020
numbermassager:

Seems to be a good way to ensure future generations will inherit a work ethic. What do you think? Does anyone have some horror stories of wealth being squandered by heirs? Or positive stories of heirs fructifying the family fortune

I think this is an overly mechanical system of "guaranteeing a work ethic." I know plenty of people who grew up less well off and don't have any ambition. I know plenty of people who grew up insanely wealthy who are very driven to live up to or exceed the advantages they were given. I don't think it's all that well correlated with financial advantage. Obviously we hear a lot more about the poor kid making good, or the rich entitled kid blowing it, but the truth is most poor people stay poor and most wealthy people stay relatively wealthy.

The one thing I do believe in, which others have referenced, is raising kids right. Not spoiling them, not giving them an indication that they'll not have to work if the don't want to... once you have a child who is old enough to be aware of their family's wealth or who are in the workforce, there is nothing more to do. Raise kids to be frugal, to value the effort that goes into earning a dollar, and then hope.

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Feb 12, 2020

Meant the SB to be helpful

Array

Feb 12, 2020

I like it. In fact I'd like to see the tax system work that way too. i.e. the first 5k you earn, you get another 5k. Next 5k, maybe you get half like 2.5k. So after earning 10k you're taking home 17.5k. Then zero percent and tax rate graduates upward like it does today. Actual numbers just illustrative, point is, start at a negative tax rate and work your way up.

Milton Friedman called it the negative income tax but nobody talks about it today. Even the UBI crowd doesn't quite do it Friedman's way, which is more efficient for everyone.

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Feb 12, 2020

This is interesting. My greatgrandpa was apparently very wealthy and had a high position in his company. His children however, either didn't attend college or got very simple degrees. After he died, the family lived off his money for a couple decades having maids/cooks, etc. without actually working or doing anything to keep the cash flow coming in. It eventually led to them breaking his mansion and land (over 100 acres) and selling the pieces off. Because of this my parents taught me the value of money and would always tell me about this story. Nowwe are upper middle class but by no means wealthy.

Feb 12, 2020

Read up on the Fuggers. Good example of how wealth can be sustained and be built to last. It's all about establishing a very strong set of values in your children that will be passed down.

Feb 12, 2020
Rahma:

Read up on the Fuggers.

Not sure I should google that at work

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Feb 13, 2020

I don't think the Fuggers' wealth lasted at all though. Going down from 50 million ducats is a big fucking deal.
The Rothschilds are a much better example of wealth preservation.

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

  • Associate 1 in S&T - FI
Feb 12, 2020

There are a couple of things I would love to do for my kids/grandkids when I get old and rich, and I think these are good ideas to ensure wealth gets passed and avoids the tax-man. Hoping to be wealthy enough to do this when I have grandkids

  1. Gift kids/grandkids the max tax-free yearly- I think its 15K now. Put that in a trust that can't be touched until 30. Maybe start letting grandkids take distributions after they finish college.
  2. Set up 529 plan to pay for college, I think tuition can also be gifted tax-free. Also pretty sure you can use this money to pay for private school.

Other than that there is not much you can do other than raise your kids properly.

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Feb 13, 2020

Run your wealth like a sovereign wealth fund. Maybe buy an African nation through a coup, then use your newfound status as head of state. If you prefer to preserve your head on top of your body, better be a benevolent dictator too a la Duke of Liechtenstein.

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

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Feb 13, 2020

I've often thought about this. Image what a good dictator would do for many African countries

Feb 13, 2020

Quality thoughts of a good dictator

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

Feb 13, 2020

I'm sure idi amin, mugabe, obiang (equatorial guinea), and more think of themselves as "good" dictators

Feb 13, 2020

"Spend all your money then when you run out jump in front of a bus" - Highschool Economics teacher (who told the school I will come back and teach if you pay for my vacation to spain)

Feb 13, 2020

Such a good topic, great job on getting this conversation started. A few conditions I would put on my kids' using trust money (if that ever comes true of course, not wealthy right now, hoping to be one day), might be naive:

For college:
- Pay for college tuition + living expenses if they get in a top 25 schools
- Tuition only if they get in a top 25 to 50 school
- Nothing if they don't

For first house/apartment:
-Match 100% of the first deposit they're able to put aside on their own

Then have the same arrangement going for their kids with what's left over. You need to stay hungry, and I think that would be a good starting point (and somewhat realistic).

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Feb 13, 2020

HSW or bust.

MIT? Nah mate, you dont have that M A D S W A G G E R

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

Feb 13, 2020

When I did my MBA a few years back I took a class where we read a case study on family wealth. In the study, wealthy families were surveyed about what they perceived to be the biggest risks to their wealth (and the eventual transferring of it to the next generation).

More than 40% of those surveyed perceived investment risks to be the biggest risk. 25% said the economy and financial markets. 15% said political and tax factors.

Only a paltry 7% said family dynamics, communication, and relationship problems were major risks.

Well, as it turns out, only 3% of failures (defined as family fortunes that disappeared after 3 or less generations) could be attributed to investments, economy/markets, and political/tax factors.

How about the lack of work ethic / unprepared heirs of future generations? Turns out only 25% of failures can be directly attributed to that.

By far the biggest cause of failures were due to family dynamics, lack of communication and trust, inter-personal issues, etc. - accounting for over 60% of failure cases.

Most families (not just wealthy families) strive to raise independent, strong children while just assuming that the family is a cohesive team / unit. If you are lucky, yes, but the reality is not always the case. George Burns once famously joked that "Happiness is having a large, loving, close-knit family in another city." What I am getting at is it takes a lot of time and effort to create a "home team advantage" in a family that has wealth. Part of that can certainly be outsourced (e.g. education), but other important things such as communication, shared experiences/values, mutual understanding/respect, being a positive role model, among others, takes time and effort. I should emphasize that last one because there is an old saying "values are caught and not taught" - it is important for wealthy parents to be a positive role model to their children. They needs to deliberately schedule time for family activities and give their children their full, undivided attention. Of course, these are things they may not have the time or willingness to do.

In fact, experience shows that the older generation who created the original wealth often believe that since they created the wealth, they should make all the decisions and set all the rules of the family. A very top-down approach in which wealth is essentially wielded as a "weapon." This is a recipe for disaster. The next generation have their own personalities, learning methods, talents, work habits, goals and attitudes toward money. They live in a totally different world from the old generation who created the wealth in the first place. The new generation have a right to define their own success. Unfortunately, the reality is the older generation can be very fixed in their ways. It's often an attitude of "my way or the highway." It's ironic that the older generation's approach and actions taken toward preserving wealth are the same things that ultimately lead to the loss of that wealth in future generations.

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Feb 13, 2020
Comment

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

Feb 13, 2020
Comment

What concert costs 45 cents? 50 Cent feat. Nickelback.

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Feb 13, 2020