In Trusts We Trust: Controlling When Your Kids Get Your Money

For years, Australian billionaire Gina Rinehart -- one of the five richest women in the world -- has been in a headline-making fight with her kids over the family fortune. Under dispute is control of around $18 billion in a family trust, with three of Rinehart's four children dropping in and out of lawsuits against their mother after she delayed the vesting date of the family trust, thereby preventing her children from gaining control of billions of dollars when Rinehart's youngest daughter turned 25.

The result has been extended litigation, with allegations going both ways about the fitness of Rinehart to act as trustee and questions about whether the children would be able to manage their shares of the family's vast mining business responsibly.

Not Just a Billionaires' Problem

While Rinehart's case is an extreme example -- and one that might wrongly lead you to think that an ordinary trust might only create more family troubles -- plenty of well-off people have doubts about leaving substantial inheritances to their children, worrying about the potential impact of having too much money too early in life.

Many wealthy Baby Boomers who started out with modest means want their children to have the same incentive to work hard and struggle for their financial prosperity, rather than having it handed to them. Moreover, a large fraction of Boomers believe their offspring don't know how to handle money -- an opinion which might lead them to conclude their children also lacked the wherewithal to handle a large inheritance.

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Research bears out those concerns. Figures from The Williams Group estimate that barely a third of families are able to maintain control of their wealth through the second generation, and only one third of that third manage to keep third-generation control.

With some planning, though, you can provide whatever protection from your wealth that you believe your kids need.

Don't Trust Your Kids? Put Their Money in Trust

Fortunately, it's not difficult to keep your kids from squandering their newfound wealth indiscriminately. It's all about setting up controls -- the most powerful of which is creating a trust, either during your lifetime or written into your will. A trust lets you determine when and to what extent your kids and other heirs will get access to your financial resources.

For instance, in most states, children can take control of assets that aren't held in trust when they turn 18. But with a trust in place, you can choose whatever age you want.

One common strategy is to make partial distributions at various ages ranging from 25 to 45, but trust law allows for longer terms at your discretion. You can also craft the trust to allow the trustee to make distributions to your heirs at regular intervals, helping the money last as long as possible while still making it available in times of true need.

Establishing a trust also lets you choose who will have control of making investment and management decisions for your assets. By picking either a financial institution or a family adviser to act as trustee, you can ensure that someone you believe has the ability to manage your money for years or even decades will be in charge of your trust.

Most importantly, having a trust in place can actually protect your family members in certain cases. If one of your heirs is disabled or has other special needs, a well-crafted trust can provide supplemental financial support while still allowing access to available government benefits. Also, if an heir gets divorced, trust assets typically aren't considered as part of the heir's marital property, preventing the divorcing spouse from taking a share of the family fortune.

The Best Way to Set Up a Trust

Just as you can buy do-it-yourself will kits, there are ways to set up your own trust. However, in order to get the most benefits possible, it's worth it for wealthy people to get professional legal advice.

With trust laws having seen some significant changes even in the past few years, the area is complicated enough that having some professional help will ensure you don't slip up and create exactly the sorts of problems you're trying to prevent.

Obviously, the best way to handle concerns about your children's money management skills is to teach them the lessons you've learned throughout your lifetime. But if doing that doesn't allay your fears, then having a trust in place to provide additional protection is a good way to backstop your kids from their own financial mistakes.