Studies have shown that up to 70% of wealthy families lose their fortune by the second generation, and 90% by the third. Many are concerned that their children are not financially responsible enough to handle their inheritance, while others find it difficult to disclose the full extent of their wealth and explain how to retain it. Indeed, the average recipient of an inheritance waits less than 3 weeks before they buy a new car; forward planning and making the money last for their own children is not a primary concern.
In other instances, a family member may be mentally ill or have a learning disability, where they require somebody else to manage their money for them and make financial decisions on their behalf.
You can use a trust to help your family in these instances in a number of ways:
- Stagger payments – if you are concerned about inheritance being spent quickly and impulsively, you can stagger payments and ensure that your family only have full access to it at a responsible age. You can split it inheritance over several years, providing access at 18, 21, 25, and 30 years of age (for example) so that you can provide for university education and first home purchases without being concerned that it will all be gone by the time your family member leaves university.
- Create incentives – trusts can include incentives to encourage responsible behaviour and a productive lifestyle. For example, you can offer a lump sum upon graduation, help to set up a business, or even match earnings if your family member goes into a particular profession. You also have the option to discourage particular behaviours, such as drinking, drugs, or spending too lavishly by forbidding distributions from the trust.
- Appoint Trustees to help – if you are concerned that your family members will not be able to manage their own money at all, for example due to learning disabilities, you can direct your trustees to pay the money in regular intervals to a care facility, care provider, or to maintain their rent/facilities/lifestyle. This approach also minimises the loss of state benefits, such as means-tested welfare, social support, and residential care.
While there are some basic rules and requirements to setting up a trust, the framework puts you in control and helps you decide how the money will be managed once you are gone. This provides the ultimate peace of mind for self-made men and women who are concerned about maintaining their wealth into the next generation and beyond.