My daughter was born a few months ago and it suddenly hit me that, at some point, she will inherit at least part of my wealth. I also pictured the “Dad, are we rich?” conversation when she realizes that having a stay at home dad isn’t the norm.
And I tried to put myself in her shoes: how would I react if I knew from a young age that I don’t have to worry too much about money because I’m going to inherit a lot at some point? I would probably decide to spend all my money. Or at least, not make money an important parameter of my decisions.
That’s not what I want to teach her. I want her to learn that money is a tool to buy freedom and that it shouldn’t wasted on silly things and that buying stuffs isn’t going to make her happy.
So I had an idea: create a trust fund that she and our future children as well as (maybe) my nieces and nephews could “buy into”.
A trust fund is basically a separate entity managed by a trustee (a person you trust) for the account of beneficiaries (you and your family). The money deposited in the trust fund doesn’t legally belong to you anymore. You can still influence how the money is invested by setting an investment policy and revoking the trustee if he doesn’t adhere to it.
My idea would be to deposit my investments in the Triviamaster Trust and have myself and my wife as beneficiaries. My daughter could become a beneficiary as well if she deposits enough money into the trust fund.
It would work like a family pension fund with contributors and beneficiaries. For instance, she would have to put at least 30% of her income for 10 years in order to become a beneficiary. She would then be entitled to 4% (or any other SWR) of her contributions plus interest per year while my wife and I still live and then 4% of a share of the entire value of the trust fund after we pass away. Then she could do the same with her children and the values of effort, perseverance, and frugality would be passed on to the next generations. Of course, there would be some clauses if future beneficiaries get sick or invalid. Those are just examples ; there are probably better ways to structure it but you get the gist: make our heirs somehow “earn” their inheritance and simultaneously prevent dissipation of wealth.
The advantages that I see are:
Our wealth is preserved to a certain extent, since future generations are contributing to the fund ; no one can just deplete the fund. I haven’t done any simulation but my intuition is that a great way to mitigate the sequence of risk is to keep contributing to your investment. This could be just that: while my wife and I would be withdrawing from the fund, others (my children) would be contributing.
It teaches some values and prevents the so ironically called “trust fund baby mentality”.
It removes the need for future generations to learn about investments (not everyone finds that appealing). It also prevents them from doing mistakes with the money you’ve accumulated.
You leave something behind, as founder of the family trust: my great great grand children will probably know my name. Pure vanity, I know…
Tax savings (maybe)
The drawbacks are:
The money doesn’t belong to you anymore so you need a rock solid investment policy and someone you trust to implement it.
It probably cost a lot of money to set up a trust. Plus the trustee is entitled to fees as well.
You’re somehow forcing your kids into a life choice they may not necessarily like. What if they want to spend every dime they earn?
The world will be a very different place in 50 years: how do you make sure that the directives you’re giving today aren’t too restrictive? For instance: let’s say that your investment policy is “put everything in the S&P 500 ETF with the lowest fees”. What if the US turn into Japan in 20 years? Designing something that is flexible enough to adapt while restrictive enough to prevent silly mistakes is challenging.
What do you guys think? Have you thought of something similar? Are there aspects I have overlooked?