Author Topic: Confessions of a Trust Fund Baby  (Read 13807 times)

ch12

  • Pencil Stache
  • ****
  • Posts: 593
Confessions of a Trust Fund Baby
« on: May 21, 2013, 08:24:08 AM »
Confessions of a Trust Fund Baby

Every time I had a hard day at work, I would think, “I could just quit. It doesn’t matter.” What saved me was my inherent love of writing, and the recognition that quitting would make me an insufferable brat that even I wouldn’t want to live with.

Having that money sitting there gave me license to do anything. I would always be able to bail myself out of jail, pay off a hospital bill, hire a fancy lawyer. The only thing stopping me was a sense of propriety and concern for my reputation.
Still, I knew this couldn’t be the point of life. I started to study Buddhism, with its emphasis on non-attachment to worldly things. I read nonfiction books, which told me that strong relationship bonds, not money, were the best predictor of happiness. And I discovered that there is a peculiar emptiness that comes with leaving a snobby boutique loaded down with $1,500 worth of clothes and nowhere to wear them.

Then, one day, I woke up. Literally.

I was staring at the ceiling in my apartment, remembering the fight I’d had the night before with my friend (something about her offering coke to my straight-edge sister and me complaining about it to a mutual friend). She’d stomped out and left me at the club, alone, as  the lights came on. My heart was still racing from too many uppers, and suddenly I was having a panic attack. I was sobbing, barely able to breathe. I felt hollow. Were these real friends? Was this real life? Money, I realized, had bought me a well-lined, suffocating nest.

It was my 25th birthday when I realized the rules applied to me too. By that I meant the rules of personal finance, like budgets and savings accounts, but also the rules of life, like choosing good friends and treating your body well. Money, I had discovered, was not a magic bullet. Working hard, a little bit of self-denial and being nice just might be.


It's worth reading the entire narrative. It reminded me of two posts. The first is the relatively recent MMM post about working for what you get: http://www.mrmoneymustache.com/2013/03/28/the-incomparable-advantage-of-having-to-work-for-what-you-get/. The second is a post from August 2012, where he talked about his trust fund roommate/landlord: http://www.mrmoneymustache.com/2012/08/16/what-it-feels-like-to-become-rich/.

Excerpt:
Even the best intentions can lead to disaster. My first roommate in Colorado was a trust fund student whose father was the CEO of a Fortune 50 company. The dad lived on a 40-acre compound in the country with a historic stone mansion within limousine commuting distance of Manhattan. The young man was an enormous brat, drunk-driving between the Denver clubs and taking dinner with a side dish of cocaine as he waited for the next allowance check to arrive (and eventually a $5M gift when he turned 21, which would allow him to forego renting out rooms in the Boulder luxury home we shared with two other people). He had never had a job and never planned to get one. The lesson? Giving money to your kids is not necessarily a blessing.

I grew up with plenty of these people. The only people who can afford cocaine tend to be really wealthy kids, because you have to have it on a regular basis and it doesn't come cheap.

I think it's really sad to have very little motivation to act like a real, sensible human being. A huge amount of money is a curse, not a blessing.

nofool

  • 5 O'Clock Shadow
  • *
  • Posts: 69
Re: Confessions of a Trust Fund Baby
« Reply #1 on: May 21, 2013, 05:35:21 PM »
I really enjoyed that article, actually. I'm glad she realizes that money is a tool that will help her reach her goals. It's refreshing to see someone who comes from that sort of lavish lifestyle remove herself from her high-society world by choice, and not because she just lost her fortune and has no other choice.

ch12

  • Pencil Stache
  • ****
  • Posts: 593
Re: Confessions of a Trust Fund Baby
« Reply #2 on: May 21, 2013, 06:00:20 PM »
She's certainly taken a baby step in the right direction, but she's still probably far more wasteful than even Ramit Sethi, who is further up the scale. She has started to become more mindful, which is good.

KingMe

  • 5 O'Clock Shadow
  • *
  • Posts: 87
Re: Confessions of a Trust Fund Baby
« Reply #3 on: May 21, 2013, 06:07:11 PM »
My wife and I were talking before the big lottery drawing last week about what we would do with over $100 million.  I told her my worst fear would be raising insufferable children, so we'd have to give most of it away. I figured administering our gigantic foundation would keep us occupied and foreclose the possibility that our children would feel they never had to take responsibility for their lives.

ch12

  • Pencil Stache
  • ****
  • Posts: 593
Re: Confessions of a Trust Fund Baby
« Reply #4 on: May 21, 2013, 06:12:39 PM »
my worst fear would be raising insufferable children, so we'd have to give most of it away.

+1 That's a lot like the conversation that I had with my sister about winning the huge jackpot. My heartrate went up a smidgen when I saw that the lottery winner was in Florida, but promptly went back down when I realized it was in a little city to the north of Tampa.

Nords

  • Magnum Stache
  • ******
  • Posts: 3181
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Confessions of a Trust Fund Baby
« Reply #5 on: May 21, 2013, 07:30:23 PM »
I grew up with plenty of these people. The only people who can afford cocaine tend to be really wealthy kids, because you have to have it on a regular basis and it doesn't come cheap.
In his biography, Keith Richards says that he owes his longevity to really high-quality medical-grade cocaine and heroin.  But I can only imagine how many research facilities are bidding for the privilege of doing his autopsy.

And, of course, David Lee Roth is notoriously credited with the quote "I used to have a drug problem, but now I make enough money to afford it."

My brother-in-law is a CPA for wealthy high-income earners and their families, and he's quite familiar with 20-somethings showing up "hung over" (is that the right word for post-cocaine morning afters?) to sign their tax returns. 

I think it's really sad to have very little motivation to act like a real, sensible human being. A huge amount of money is a curse, not a blessing.
Here's a hypothetical question that I've been thinking on for several years.  Let's say that a parent (or two) could gift their adult offspring the amount of money that it would take their (employed) progeny to reach the contribution limits of their shiny new 401(k) and Roth IRA.  In other words, Junior has a salary and the parent is just making sure that they're maxing out the 401(k) contribution (or, at a minimum, the match) and the IRA contribution.  Ideally Junior would boost their 401(k) salary contributions to the max, immediately contribute another $5500 to their Roth IRA, and (if necessary) live off the parent's gift-cash stash to make up for their reduced take-home pay.

It's a great way to bequeath a tax-deferred inheritance while maximizing its compounding.  After all, each year's 401(k) and Roth IRA contributions can only be maxed out during the contribution time limits and can't be "rolled over" to future contribution years.  Ideally the Junior Mustachian would also put aside at least 20%-25% of their remaining take-home pay into taxable investment accounts, which would accelerate their compounding and their financial independence.  I realize there are ways to tap the tax-deferred accounts (even with penalties) but ideally the hassle factor of doing so would deter the temptation and inspire a modicum of responsible financial behavior.  In addition, that small (but growing) stash might be much more useful in their 20s and 30s than it would be for them to inherit in their 60s.

Gotta know your kid, assuming such perception is possible.  A parent would only have to do this for one year to see whether their young adult is growing a 'stache or whether they're turning into a trust-fund baby.  Each year they could decide whether to do it for a subsequent year (ideally discussing it with their adult child) or instead conclude that it's time to start 529 accounts for the grandkids.

Of course a parent would only do this if they were on track for their own retirement, long-term care insurance, and so on.  I'm assuming that they have the disposable assets to find more joy in gifting up to $28K/year to their kid(s) instead of jetting off to Phuket.  3-4 years of that level of gifting is probably all that it would take to jump-start Junior's journey to FI.

If this had happened to me as a 21-year-old with a hotshot ensign's paycheck, I would've immediately maxed out the retirement contributions and stashed another 50% of my income in taxable accounts.  Back then maybe I would've spent $1000-$2000 of 1980s cash on a really nice PC or a high-end monitor or a weekend getaway vacation, but I would've been too busy with career to really do BMW-class damage.  I doubt that I would've turned into a trust-fund baby or had my initiative & motivation stunted by the money.  Of course when I reached 12 years of military service and the fun stopped, I certainly might have thought twice about gritting my teeth and gutting it out to a military pension-- I would've felt financially secure enough to leave active duty for the Reserves.  But all of those decisions would've been rooted in my personality.

I know two officers who immediately turned into trust-fund babies when they received their own trust funds-- one in his 20s and the other in her early 40s.  But I served with thousands of officers & enlisted, some of whom managed their money responsibly and presumably would've benefited from the knowledge that they'd laid a foundation of retirement savings. 

So is this a smart inheritance tax-avoidance tactic, or is it just encouraging a nasty case of trust-fund baby affluenza?

FlorenceMcGillicutty

  • Stubble
  • **
  • Posts: 116
Re: Confessions of a Trust Fund Baby
« Reply #6 on: May 21, 2013, 07:54:37 PM »
Nords, I'm no expert on this but I think you know your kids better than anyone. If giving money in the form of retirement works for your kids, I think that's an incredible gift. It's also a far cry from a trust fund in the form of a blank check.

lhamo

  • Walrus Stache
  • *******
  • Posts: 9554
  • Location: Seattle
Re: Confessions of a Trust Fund Baby
« Reply #7 on: May 22, 2013, 06:01:33 AM »
Here's a hypothetical question that I've been thinking on for several years.  Let's say that a parent (or two) could gift their adult offspring the amount of money that it would take their (employed) progeny to reach the contribution limits of their shiny new 401(k) and Roth IRA.  In other words, Junior has a salary and the parent is just making sure that they're maxing out the 401(k) contribution (or, at a minimum, the match) and the IRA contribution.  Ideally Junior would boost their 401(k) salary contributions to the max, immediately contribute another $5500 to their Roth IRA, and (if necessary) live off the parent's gift-cash stash to make up for their reduced take-home pay.

It's a great way to bequeath a tax-deferred inheritance while maximizing its compounding.  After all, each year's 401(k) and Roth IRA contributions can only be maxed out during the contribution time limits and can't be "rolled over" to future contribution years.  Ideally the Junior Mustachian would also put aside at least 20%-25% of their remaining take-home pay into taxable investment accounts, which would accelerate their compounding and their financial independence.  I realize there are ways to tap the tax-deferred accounts (even with penalties) but ideally the hassle factor of doing so would deter the temptation and inspire a modicum of responsible financial behavior.  In addition, that small (but growing) stash might be much more useful in their 20s and 30s than it would be for them to inherit in their 60s.

I have the idea to do something similar to this for our kids, as long as our financial situation allows us to do so.  Basically set up a matching fund system for different things.  So, whatever they put into their 401k, we'll match (if a small amount) or add an extra percentage for them to put in a Roth.  Saving for a house?  Set a time period/target date and tell them will gift them a matching amount of whatever they are able to save in that time.  IF they ever have to take out student loans (something we're trying to avoid, but that I want to remain open to if it is an informed choice they make for solid reasons), we'll match their payments for a certain amount of time.  For any of these we would probably have a cutoff rule to discourage excessive spending in other areas (like if they have a credit card balance they can't pay off two months in a row, the matching funds stop until they get that paid off and are credit card debt free for X months).  Basically the idea is to help them establish good savings/debt avoidance patterns and get off to a good start financially.

gdborton

  • Bristles
  • ***
  • Posts: 254
  • Age: 30
  • Location: Muncie, Indiana
    • Gary Borton
Re: Confessions of a Trust Fund Baby
« Reply #8 on: May 22, 2013, 06:48:58 AM »
Here's a hypothetical question that I've been thinking on for several years.  Let's say that a parent (or two) could gift their adult offspring the amount of money that it would take their (employed) progeny to reach the contribution limits of their shiny new 401(k) and Roth IRA.  In other words, Junior has a salary and the parent is just making sure that they're maxing out the 401(k) contribution (or, at a minimum, the match) and the IRA contribution.  Ideally Junior would boost their 401(k) salary contributions to the max, immediately contribute another $5500 to their Roth IRA, and (if necessary) live off the parent's gift-cash stash to make up for their reduced take-home pay.

It's a great way to bequeath a tax-deferred inheritance while maximizing its compounding.  After all, each year's 401(k) and Roth IRA contributions can only be maxed out during the contribution time limits and can't be "rolled over" to future contribution years.  Ideally the Junior Mustachian would also put aside at least 20%-25% of their remaining take-home pay into taxable investment accounts, which would accelerate their compounding and their financial independence.  I realize there are ways to tap the tax-deferred accounts (even with penalties) but ideally the hassle factor of doing so would deter the temptation and inspire a modicum of responsible financial behavior.  In addition, that small (but growing) stash might be much more useful in their 20s and 30s than it would be for them to inherit in their 60s.

I have the idea to do something similar to this for our kids, as long as our financial situation allows us to do so.  Basically set up a matching fund system for different things.  So, whatever they put into their 401k, we'll match (if a small amount) or add an extra percentage for them to put in a Roth.  Saving for a house?  Set a time period/target date and tell them will gift them a matching amount of whatever they are able to save in that time.  IF they ever have to take out student loans (something we're trying to avoid, but that I want to remain open to if it is an informed choice they make for solid reasons), we'll match their payments for a certain amount of time.  For any of these we would probably have a cutoff rule to discourage excessive spending in other areas (like if they have a credit card balance they can't pay off two months in a row, the matching funds stop until they get that paid off and are credit card debt free for X months).  Basically the idea is to help them establish good savings/debt avoidance patterns and get off to a good start financially.

First off, let me say that you are both awesome parents.  Not only have you put some thought about your own finances, but you've given enough thought to your children to help them while still instilling them with a work/saving ethic.

On the other hand, I absolutely hate (admittedly biased) people with parents as good as you.  I grew up with less than nothing, and busted my ass pretty much everyday to ensure that I'd have a better future for myself.  It really sucks that every year I see parents leveling the playing field for their kids, and it seems that my dedication, ingenuity, and hard work mean less and less.

Fletch

  • Stubble
  • **
  • Posts: 142
  • Location: DC
Re: Confessions of a Trust Fund Baby
« Reply #9 on: May 22, 2013, 10:35:57 AM »

Here's a hypothetical question that I've been thinking on for several years.  Let's say that a parent (or two) could gift their adult offspring the amount of money that it would take their (employed) progeny to reach the contribution limits of their shiny new 401(k) and Roth IRA.  In other words, Junior has a salary and the parent is just making sure that they're maxing out the 401(k) contribution (or, at a minimum, the match) and the IRA contribution.  Ideally Junior would boost their 401(k) salary contributions to the max, immediately contribute another $5500 to their Roth IRA, and (if necessary) live off the parent's gift-cash stash to make up for their reduced take-home pay.

It's a great way to bequeath a tax-deferred inheritance while maximizing its compounding.  After all, each year's 401(k) and Roth IRA contributions can only be maxed out during the contribution time limits and can't be "rolled over" to future contribution years.  Ideally the Junior Mustachian would also put aside at least 20%-25% of their remaining take-home pay into taxable investment accounts, which would accelerate their compounding and their financial independence.  I realize there are ways to tap the tax-deferred accounts (even with penalties) but ideally the hassle factor of doing so would deter the temptation and inspire a modicum of responsible financial behavior.  In addition, that small (but growing) stash might be much more useful in their 20s and 30s than it would be for them to inherit in their 60s.

First off, let me say that you are both awesome parents.  Not only have you put some thought about your own finances, but you've given enough thought to your children to help them while still instilling them with a work/saving ethic.

On the other hand, I absolutely hate (admittedly biased) people with parents as good as you.  I grew up with less than nothing, and busted my ass pretty much everyday to ensure that I'd have a better future for myself.  It really sucks that every year I see parents leveling the playing field for their kids, and it seems that my dedication, ingenuity, and hard work mean less and less.

I am adult offspring on the receiving end of a similar (but smaller) gift, so I'll offer my perspective.
It is EXTREMELY helpful to have such a gift at my current early stage of my career. I had savings when I exited college, but not necessarily enough to live on for the six months it took me to find a real job (I worked part-time at a restaurant to bridge the gap), especially considering I had just moved across the country and had no furniture, had to pay deposits on an apartment, etc. I didn't immediately start putting this gift into my ROTH or using the excess to contribute to my 401k, but I am now. Without this kind of gift, it would have much more difficult to find room in my budget to make retirement contributions feasible, and I would still be spinning my wheels trying to replenish savings to get enough for an emergency fund should I end up un- or under- employed for 6 months again.

I guess the point I'm making is having a little bit of support gave me the security/peace of mind to decide for myself that I could make ends meet every month while contributing to retirement accounts, and now that the habit (and automatic transfers) are in place it would be much easier to continue to do so without support. I had never looked at it from the perspective of an early inheritance in tax-efficient vehicles, but it certainly makes sense now that you mention it.

And gdborton, I recognize that I am extremely lucky and privileged to be in this financial situation, but I still bust my ass every day so I don't rely on this situation, so I would ask that you save the worst of your hate for people who take their privilege for granted. (That was not intended to be inflammatory, I understand why you would hate people like me...just please don't hate me in particular.)

gdborton

  • Bristles
  • ***
  • Posts: 254
  • Age: 30
  • Location: Muncie, Indiana
    • Gary Borton
Re: Confessions of a Trust Fund Baby
« Reply #10 on: May 22, 2013, 11:53:31 AM »
Quote
And gdborton, I recognize that I am extremely lucky and privileged to be in this financial situation, but I still bust my ass every day so I don't rely on this situation, so I would ask that you save the worst of your hate for people who take their privilege for granted. (That was not intended to be inflammatory, I understand why you would hate people like me...just please don't hate me in particular.)

That was badly worded... I hate the fact that some people have a security net/financial backing of parents, not so much the people themselves (although some I do).

jrhampt

  • Handlebar Stache
  • *****
  • Posts: 1071
  • Age: 41
  • Location: Connecticut
Re: Confessions of a Trust Fund Baby
« Reply #11 on: May 22, 2013, 12:33:39 PM »
Quote
And gdborton, I recognize that I am extremely lucky and privileged to be in this financial situation, but I still bust my ass every day so I don't rely on this situation, so I would ask that you save the worst of your hate for people who take their privilege for granted. (That was not intended to be inflammatory, I understand why you would hate people like me...just please don't hate me in particular.)

That was badly worded... I hate the fact that some people have a security net/financial backing of parents, not so much the people themselves (although some I do).

I am secretly jealous and somewhat resentful as well, although I try not to be and realize this isn't a constructive attitude.  I am also jealous of these people because they won't have to support their parents financially in the future, either (presumably).  I have a really hard time thinking about this with my parents who got help with college education and down payments and small inheritances, whereas I didn't get any of that stuff from them and know that they have not funded their retirements at all.

Self-employed-swami

  • Handlebar Stache
  • *****
  • Posts: 1094
  • Location: Canada
Re: Confessions of a Trust Fund Baby
« Reply #12 on: May 22, 2013, 12:36:19 PM »
I didn't grow up with a trust fund, but my younger sister and I did receive a far sized inheritance, over about 4 years in instalments, after our Mom passed away (about $400,000 in total).

I was 23 when Mom died, and she was 18.  The affect it has had on how we live, were very different.  I was almost done university, and got married the following year.  I had already experienced the poor student lifestyle, and knew the value of hard work, to earn money.  Did I make some foolish spending decisions, you betcha!  But, I always have had a job since then (it's been 5.5 years since Mom's death).  We paid off my small student loans, bought a more reliable vehicle (a 2005 Matrix) and then a house.  We went on a few vacations that we wouldn't have done otherwise (and spend about $12,000 on our wedding), but most of the money is locked up in investments/real estate.  Having that extra cushion of cash also allowed me to quit my day job, and go after self employment.  It allowed my husband to go back to school as well, without having to worry about more loans for him, or the hit to our cash flow for 2 years.

My sister has never known what it was like to be a poor student, and has unrealistic ideas about what her life should be like.  She is now 23, and getting better (bought a condo with her $$$) but she certainly wasted a lot more than I think I did (evidenced by the brand new 2013 fully loaded Rav4 she bought last year, after selling her perfectly good 2005 Corolla our dad gifted to her).

I guess what I am saying is, it depends on the person, and what their other life experiences were.  DH and I lived in a basement suite with mould, and ceilings so low, he couldn't put his hands above his head when standing, which makes me appreciate our lovely house so much more. 

I think if I'd started receiving money like that at 18, I'd likely be a lot different also.

Fletch

  • Stubble
  • **
  • Posts: 142
  • Location: DC
Re: Confessions of a Trust Fund Baby
« Reply #13 on: May 22, 2013, 01:37:24 PM »

That was badly worded... I hate the fact that some people have a security net/financial backing of parents, not so much the people themselves (although some I do).

I am secretly jealous and somewhat resentful as well, although I try not to be and realize this isn't a constructive attitude.  I am also jealous of these people because they won't have to support their parents financially in the future, either (presumably).  I have a really hard time thinking about this with my parents who got help with college education and down payments and small inheritances, whereas I didn't get any of that stuff from them and know that they have not funded their retirements at all.

Well, one of my parents is dead, which eliminates half of the future support worries (the life insurance is probably also part of why I receive an "allowance").

As unlikeable as the trust fund baby is in the original article, they do a good job of illustrating that money doesn't equal happiness. I would even speculate that unearned excess money is an attempt to make up for some other deficiency in life (living parents, morals, the satisfaction of doing things for yourself, etc.) and can lead to other, new deficiencies like no true friendships or lack of motivation, as the trust fund baby illustrates.

tl;dr: Everyone can find a reason to be unhappy with the results of Karma's bitchy reallocation of good/bad.

ch12

  • Pencil Stache
  • ****
  • Posts: 593
Re: Confessions of a Trust Fund Baby
« Reply #14 on: May 22, 2013, 08:42:20 PM »
I'm on board with parents who help fund retirement accounts. It's a really great idea. I know that one of my friends had her dad completely maxing out her Roth IRA.

I know that rjack, in another thread, talked about giving his sons 100k each for college and giving them the excess. My parents aren't giving me 100k (I wish!), but they have given me a substantial amount that makes me financially stable. I think that it's worth doing; money at this moment means more than an equal amount of money later (for example, when the parents are dead and the money is inherited).

The money I have is enough to keep me afloat if I were to lose my job (which I'm starting in less than 2 weeks). I briefly toyed with the idea of going abroad for a year because I don't have a ton of obligations or responsibilities as a recent college grad. While the idea of circumnavigating the globe (my dream) is awesome and completely worth doing, I feel bad being frivolous with the money; I could easily afford it and have money left over, but I think of it more as my parents' money than mine, since they earned it.

My generous parents have already funded my study abroad trips to four different countries in four consecutive years. My dad is 100% supportive of my traveling, since it seems to be a common wish on his part and on the part of relatives on his side of the family.

Therefore, my plans are to hit FI and then travel for a bit, completing a loop around the world. In the interim, I read posts from CuencaSolo in the MMM forums and stuff like this about Sa Pa, Vietnam on Quora: Living in SE Asia for very little.

Nords

  • Magnum Stache
  • ******
  • Posts: 3181
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Confessions of a Trust Fund Baby
« Reply #15 on: May 22, 2013, 09:10:15 PM »
First off, let me say that you are both awesome parents.  Not only have you put some thought about your own finances, but you've given enough thought to your children to help them while still instilling them with a work/saving ethic.
On the other hand, I absolutely hate (admittedly biased) people with parents as good as you.  I grew up with less than nothing, and busted my ass pretty much everyday to ensure that I'd have a better future for myself.  It really sucks that every year I see parents leveling the playing field for their kids, and it seems that my dedication, ingenuity, and hard work mean less and less.
Thanks-- taken as a compliment.  The short version is that my spouse and I are trying to rise above our raisings.  We're not doing this for our daughter's personal lifestyle-enhancement benefit as much as we're paying forward what we wish had been available for us when we were this age.  It'll make my spouse and me feel better about ourselves than our daughter will ever feel about her finances. 

I just hope that in our parental efforts to feel good about ourselves that we don't inadvertently mess up our daughter.  Frankly, giving $28K to a 20-something is highly risky (gotta know your kid) yet the tax-deferred aspect of this scheme is too important to screw up.  By 2016 I may have decided that it's not working.

I was raised in financial blissful ignorance and I have no idea whether my parents could have afforded Penn State, let alone Carnegie-Mellon.  However the U.S. Naval Academy was very affordable (luckily it was also my top choice).  Our daughter's been raised by two USNA alumni, and she thinks that the Navy is a great deal.  She may be right, but I'd feel pretty crappy if the submarine force someday does to her what I've seen it do to a few of my shipmates.  I don't want her to be at a point in her military career where she feels coerced to stay Navy for the paycheck (like I was), let alone the nuke bonus, and I'm trying to get her to trust that she has the skills to earn her own living.  Having a stash in the retirement accounts might be just the confidence booster that she needs.  I had my own "military inferiority complex" when I was on active duty, but I think she's seeing her own bright light.

The college fund has never been part of our retirement portfolio.  When our daughter was born in 1992, we started investing $100/week in a separate account.  Once we had a couple years of community-college tuition built up in EE bonds, we went aggressive.  From 1996-2001 we invested in Tweedy Browne Global Value and in 2002 switched to Berkshire Hathaway.  That worked out great until early 2008 when we went into CDs.  By the time compounding had finished working its magic, we had nearly enough to afford to pay Rice University's full retail price.

Then our daughter went out and got herself a Navy ROTC scholarship.  Her idea, but biased by what she sees as a great lifestyle.  Navy is paying about 75% of her college degree, although of course that's going to be taken out of her hide a nickel at a time for five years after graduation. 

Since she's saving us most of the college fund, it seems fair to do a little parental profit sharing.  My spouse and I have no plans to spend it, and it makes no sense to lock it away until our daughter's in her 60s (or even older).  Hence the idea of gifting her now so that she'll max out her retirement accounts.  She's definitely earned the money, but I think it's best to lock it away as much as possible to discourage the temptation of lifestyle creep.  She's been doing well with four-figure sums of money (buying her first car, living off-campus) so she's probably ready to step up another digit.  She'd better be, because the Navy is bribing junior officers to stick around for $30K/year bonus money.  Back in 1990 I thought $10K/year was a fair trade.  Today I'm more skeptical about the value of $30K/year.

I am adult offspring on the receiving end of a similar (but smaller) gift, so I'll offer my perspective.
It is EXTREMELY helpful to have such a gift at my current early stage of my career.
Without this kind of gift, it would have much more difficult to find room in my budget to make retirement contributions feasible, and I would still be spinning my wheels trying to replenish savings to get enough for an emergency fund should I end up un- or under- employed for 6 months again.
I guess the point I'm making is having a little bit of support gave me the security/peace of mind to decide for myself that I could make ends meet every month while contributing to retirement accounts, and now that the habit (and automatic transfers) are in place it would be much easier to continue to do so without support. I had never looked at it from the perspective of an early inheritance in tax-efficient vehicles, but it certainly makes sense now that you mention it.
I'm on board with parents who help fund retirement accounts. It's a really great idea. I know that one of my friends had her dad completely maxing out her Roth IRA.
I know that rjack, in another thread, talked about giving his sons 100k each for college and giving them the excess. My parents aren't giving me 100k (I wish!), but they have given me a substantial amount that makes me financially stable. I think that it's worth doing; money at this moment means more than an equal amount of money later (for example, when the parents are dead and the money is inherited).
Thanks, guys, that's the confirmation bias I'm seeking.  I'm hoping this retirement-savings subsidy wouldn't stunt a 20-something's motivation & initiative, like the trust-fund baby who told herself "Oh, I can quit this job if I don't like it". 

I am also jealous of these people because they won't have to support their parents financially in the future, either (presumably).  I have a really hard time thinking about this with my parents who got help with college education and down payments and small inheritances, whereas I didn't get any of that stuff from them and know that they have not funded their retirements at all.
The jury's still out on whether our daughter will have to support her parents! 

My father ER'd in the late 1980s and lived very frugally on his pension, investing almost half of it in equities for the last 25 years.  Today his pension & Social Security pay about half of his expenses at the care facility, and I think his assets will probably outlast his Alzheimer's.  Spouse's parents are so conservative in their investments, and have such family longevity, that I suspect they're going to run out of money.  They're cheapskates (in the full pejorative sense of the term) but they've been in CDs for over a decade... and they have at least two more decades left.

My spouse and I each have our own military pensions, which I suspect will be pretty popular with the care facilities of the year 2040 or later.

But again I'm mainly trying to break the cycle and help our daughter avoid what I'm having to do today for my father (and what he had to do for his) and what we might have to do for spouse's parents.  As much as it may benefit her, it's going to make me feel even better.
« Last Edit: May 22, 2013, 09:15:26 PM by Nords »

sol

  • Walrus Stache
  • *******
  • Posts: 8492
  • Age: 42
  • Location: Pacific Northwest
Re: Confessions of a Trust Fund Baby
« Reply #16 on: May 22, 2013, 09:59:07 PM »
Non-mustachian high-roller and occasional forum participant Joshua Kennon (http://www.joshuakennon.com/) has written a bunch about the utility of trusts, even for families of modest means.  In part because there are phenomenal tax benefits, but in part because it's a way to control your legacy. 

You can dictate the terms of the trust disbursements, so it (for example) could only pay out an amount each year equal to 10% of the beneficiary's earned income from the previous year.  Or only as much a they devote to retirement savings.  Or a flat fee based on some life milestone, like finishing college or amassing 100k of their own liquid assets.  Or any combination.

I think there's a fruitful discussion, or at least period of introspection, to be had thinking about how much money you'd like to pass on this way.  Giving a 25 year old 10 million dollars probably ruins them. Giving them 5 thousand probably doesn't do them very much good.  Is there some middle ground, maybe age dependent, where a trust disbursement is still a leg up in life without pushing someone over into trustfund brat territory?

I also enjoyed this article about how he plans to guarantee that none of his ever-multiplying family descendants are ever below middle class, in perpetuity, by setting aside $50k today:  http://www.joshuakennon.com/creating-huge-wealth-with-trust-funds/
« Last Edit: May 22, 2013, 10:02:05 PM by sol »

kt

  • Guest
Re: Confessions of a Trust Fund Baby
« Reply #17 on: May 23, 2013, 01:40:14 AM »
very interesting to read about this. i don't have kids or currently any money to give potential future kids but it's always good to consider and have these things on your radar.
when i moved back home temporarily after uni i paid my parents rent. they later said if i'd've stayed there for longer than a year they may well have given me the money back towards a house deposit. which i thought was an interesting way to approach it. i think i would have felt guilty taking it back though.

Herr Handlebar

  • 5 O'Clock Shadow
  • *
  • Posts: 26
  • Age: 42
  • Location: Seattle, WA
  • Novice Mustachian Getting Less Novice Everyday
    • Becoming Mustachian: One Family's Journey Toward Early Retirement
Re: Confessions of a Trust Fund Baby
« Reply #18 on: May 23, 2013, 06:47:22 AM »
I also enjoyed this article about how he plans to guarantee that none of his ever-multiplying family descendants are ever below middle class, in perpetuity, by setting aside $50k today:  http://www.joshuakennon.com/creating-huge-wealth-with-trust-funds/

Hehe. Joshua certainly comes from a position of affluence. "Whatever I ultimately do, I want the trust fund to generate enough money for each beneficiary that it will be a help when trying to achieve regular life goals... But, equally as important, it should not be enough to sit around doing nothing... The figure I finally settled on would be $25,000 in cash (that is after taxes)." Apparently $25k is not enough to sit around and so noting in the mind of someone like Joshua. 

(note: I like Joshua's blog and imagine he is a quite nice person. It just amuses me how little he thinks of $25k net.)

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Confessions of a Trust Fund Baby
« Reply #19 on: May 23, 2013, 07:56:49 AM »
If you can earn 9% after inflation for 70 years, he should start up a hedge fund and start making millions a year. It is "easy" to have a hot 10-20 years   That would be something like 12% before inflation. Now you might go the difference between the 9-10% which the markets have done historically and the 12% doesn't seem like much but look at how they change the numbers

50k @9% = 20 million
50k@8% = 11 million
50k@7% = 5.7 million
50k@6% 2.9 million (i.e. about the markets historical inflation adjusted return with dividends. varies a bit depending on how exactly they do the math )

And this is before paying any taxes which will reduce your returns by 1-2%.
5% 1.5 million
So I am thinking that about 10x as much money is needed and even then I am not sure if the trust will keep up with the growth of the family (i.e. 30 kids this generation is 90 in another which turns into 270) and life spans (people going from 75 to 95).

Compound interest is awesome but a lot of times we try to inflate its value too much by using long time frames and inflated returns. Of course if you happened to invest in Berkshire Hathaway in 1965 (and you think life will be good for another 20+ years), you can laugh at my math and start using 15% as your return.


I also enjoyed this article about how he plans to guarantee that none of his ever-multiplying family descendants are ever below middle class, in perpetuity, by setting aside $50k today:  http://www.joshuakennon.com/creating-huge-wealth-with-trust-funds/

upnorth

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Confessions of a Trust Fund Baby
« Reply #20 on: May 23, 2013, 08:02:01 AM »

I also enjoyed this article about how he plans to guarantee that none of his ever-multiplying family descendants are ever below middle class, in perpetuity, by setting aside $50k today:  http://www.joshuakennon.com/creating-huge-wealth-with-trust-funds/

I just read this post yesterday too.  It's an interesting idea.  I think the key is to have it pay out either in increments or when the child is older (i.e. 25-30).  Need to research it a little more though.  I may look into the pros/cons for my own kiddo. 

Fletch

  • Stubble
  • **
  • Posts: 142
  • Location: DC
Re: Confessions of a Trust Fund Baby
« Reply #21 on: May 23, 2013, 08:12:59 AM »

I think there's a fruitful discussion, or at least period of introspection, to be had thinking about how much money you'd like to pass on this way.  Giving a 25 year old 10 million dollars probably ruins them. Giving them 5 thousand probably doesn't do them very much good.  Is there some middle ground, maybe age dependent, where a trust disbursement is still a leg up in life without pushing someone over into trustfund brat territory?


I would disagree about the $5000 doesn't do much good. I'm about 25, and that's about the amount I get yearly (not from a trust). To someone in the early stages of their career -who is making $30k or less, who probably has student loans, and who doesn't have a significant amount of savings to cover all the uncertainty that comes along with living in temporary living arrangements and a lack of work experience- $5000 is a lot of money.
It isn't enough to not have a job, but it bridges the gap for some of the inevitable mistakes/surprise expenses (such as security deposits, insurance deductibles, etc.) that young people make while they figure out how to be a real adult. If they do have their act together, it's a fully funded ROTH. Obviously it seems like less money if you are a 25 yr old making $70k+.
Hopefully by the time your kid is out of college you know them well enough to know what amount will motivate and help them without ruining them, or you know that you raised them with the right set of values to make good decisions regardless of of what you give them. It sounds like Nords' daughter is already making pretty good choices; if it was money designated for her college it seems reasonable to pay forward the money she saved through ROTC. I'm not sure I would do a trial run with $23,500 the first year though.....

The_Dude

  • Stubble
  • **
  • Posts: 194
Re: Confessions of a Trust Fund Baby
« Reply #22 on: May 23, 2013, 10:12:16 AM »
I see a lot of people throwing around the age of 25 for being a good year to target some sort of financial distribution.  Personally, I think that is much too young if a parent's goal is to not change their kid's behavior but to still make life a bit more secure.  Gifting a large sum of money at age 25 to an average college graduate will have a much greater chance of changing behavior than providing the gift 30-35.  I've been a fan of this thinking since I read "The Millionaire Next Door." 

Parents in a position to make substantial cash gifts to their children are most likely also in the position to pay for their children's college education and likely influence their children enough to ensure they go to college.  At 25, this person may only have ~3 years under their belt in the "real world" which while valuable won't be significant enough to shield them from the temptations money would bring in their 20's. 

All my opinion of course and for full disclosure I'm totally biased.  I received help in paying for college even through I chose (because of parent's help it was a choice) to work full time while attending college.  Because I chose to work as a minor and my parents did my taxes for me I didn't know they also matched all of my earned income in IRA contributions which they continued to subsidize during college and after.  I'm grateful that I didn't receive more help because I realize that today in my mid 30's I'm a much different person financially than I was 10+ years ago.  Despite the fact that, In my subjective opinion, I've been way above average in financial knowledge and a LBYM lifestyle I'm not sure I would of continued on the same track if a pile of cash was dropped in my lap at 25.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Confessions of a Trust Fund Baby
« Reply #23 on: May 24, 2013, 08:18:21 AM »
It is a balancing act 50k at 25 might influence the behavior more but it will also help the kids life more. If you give your kid 50k at 40, it probably should just get dumped into retirement savings. On the other hand giving 25 year old 50k might be enough to buy a house 5 years earlier, take a big big business risk,  do some personal growth thing, and so on. Or he could buy some fancy car.


I see a lot of people throwing around the age of 25 for being a good year to target some sort of financial distribution.  Personally, I think that is much too young if a parent's goal is to not change their kid's behavior but to still make life a bit more secure.  Gifting a large sum of money at age 25 to an average college graduate will have a much greater chance of changing behavior than providing the gift 30-35.  I've been a fan of this thinking since I read "The Millionaire Next Door." 


KingMe

  • 5 O'Clock Shadow
  • *
  • Posts: 87
Re: Confessions of a Trust Fund Baby
« Reply #24 on: May 24, 2013, 10:10:03 AM »
I drafted wills that would give my children part at 25, part at 30, and the rest at 35. This would only take effect if both my wife and I had untimely deaths.  Even if they squander their inheritance at 25, they would be able to redeem themselves at 30 and hopefully be truly responsible at 35. The long delay in getting the majority of the corpus at 35 is intended to encourage them to take responsibility for themselves and not rely on their inheritance.

Personally, I would be a model beneficiary. I know people, even brothers, who had much different attitudes towards inherited wealth and large monetary gifts. You can't predict the future. I figure a good beneficiary would not mind if the inheritance were compounding year over year and a bad beneficiary would be resentful. But if they're resentful to have to wait, doesn't that validate the decision to delay the inheritance?