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What to do if your child is a spendthrift?

Many people wonder about passing along their assets to a child who tends to overspend and hasn’t show an ability to manage money.  They worry that such a child will blow through an inheritance quickly and wont have the money to live on as he or she gets older.

Fortunately, there are ways to provide for such children while at the same time protecting them from themselves.

For instance, you can put assets into a trust and give the trustee detailed instructions stating under what conditions and for what purposes the assets can be given to the child.

Many people who set up such a trust select a professional trustee or bank for this purpose as opposed to a family member, on the theory that a professional trustee will be less likely to give in to the pressure from the child.

A trust can also be a good idea for children who are simply too young to be trusted with large amounts of money.  A trustee can manage the money until the child reaches a certain age at which point the child can receive the funds outright.

Trusts can also be used for children who have a history of gambling or addiction.  And they can protect assets for children who are at risk for divorce or who are in a profession where there is a possibility of lawsuits (such as an obstetrician).

Some people go so far as to create trusts that specifically reward children for certain conduct.  For instance, trust payments could be increased if the child earns a certain salary, performs community service work does not relapse into an addiction etc.  These trusts can be very beneficial for certain children.  However, it can be hard to set up the incentives with precision such that the trustee can verify exactly what payments are owed.  Also, there’s a danger that the trust will punish a child at the moment when he or she is most in need of support.

Yet another idea is to give a child a minority interest in a family limited partnership that is managed by a more responsible family member, who will make decisions about investments, dividends, etc.  This allows the child to benefit from family assets without having too much control over them.

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