What happens when your children inherit a large amount of money? Can an inheritance ruin motivation, relationships, or a child’s future? How do you prevent children from becoming entitled “trust fund babies?” What kind of trust encourages personal growth and responsibility? What are incentive trusts? What are discretionary trusts? Can your Will or Trust protect your kids from bad decisions, addiction, or divorce? How do you pass on wealth and wisdom?
by James L. Cunningham Jr., Esq.
You worked hard. You played it smart. You saved, invested, and maybe even built a successful business or real estate portfolio. Now you’re looking at your estate and thinking, “If I leave all this to my kids, will it help them, or hurt them?”
If you haven’t asked that question yet, you should.
Because when money falls out of the sky—whether it’s $100,000 or $100 million—it can crash like a meteor. It can wreck your child’s motivation, damage relationships, lead to addiction, attract lawsuits, and even accelerate divorce. And yes, I’ve seen every one of those tragedies up close.—oo many times to count.
Let me be blunt: Money can ruin people. Even smart people. Even your people. Even people with great intentions and bright futures.
So, what can you do about it? Create structures and pathways instead of simple windfalls for your family. Work with professionals who understand asset protection to make sure that large payouts don’t trigger catastrophic tax consequences or create opportunities for predatory lawsuits or unscrupulous creditors. That kind of planning will benefit even the most successful and responsible of heirs.
This article will outline some real-world strategies to help preserve your wealth and protect your kids.
Need help with all this? Book a call with CunninghamLegal. We can work together to build specific approaches that work for your family. Let’s dive in.
What’s the Problem with “Trust Fund Babies?”
I never liked the term “trust fund baby,” but I understand where it comes from and why the “baby”double entendre. Let’s be fair here. Many children of wealthy families grow up to be hard-working professionals who build on their parents’ success and legacy. But others struggle in life, despite—or perhaps because of—their great wealth. Children who have a large trust fund can face a wide range of challenges, from a lack of motivation to downright risky behaviors. Complicating matters even more, children and adults who grew up in the shadow of money they didn’t earn often don’t know how to manage it, let alone protect it.
One of my clients, a successful entrepreneur, was exasperated: “My son keeps asking for money. He’s 30. He’s never had a job. Why would he? He knows Mom and Dad will bail him out.”
Another client told me, “My daughter got a seven-figure inheritance, quit her job, and took off for Bali. That was three years ago. She’s still there.”
Sudden windfalls can also trigger divorces when divorce suddenly becomes financially feasible. And inheritances can be tapped—even by ex-spouses—if not structured and managed properly.
That’s the trust fund trap. But it’s not about giving too much. It’s about giving without structure.
Structure is everything.
You wouldn’t hand the keys to an 800-horsepower Ferrari to a 16-year-old. Don’t hand your financial legacy to someone who hasn’t yet learned how to handle it.
What Technical Mistakes Can Endanger the Value of a Trust for the Next Generation?
Let me just make two points about the technical side of trust design before I dive into doing right by your kids.
First: You need to find a qualified California Estate Lawyer to structure a good trust of any kind. It’s not a job for a generalist attorney, especially if significant assets are involved. Specialized trusts holding large assets can take many forms, from Charitable Trusts that also benefit heirs, to Dynasty Trusts for multiple generations, to trusts created for incapacitated and irresponsible heirs. Need to discuss the options? Book a call with CunninghamLegal today.
Second: People with the best intentions, including lawyers screw up trusts all the time. Too often, they don’t understand the tax consequences of trust structures and may not create proper protections against predatory lawsuits, creditors, and ex-spouses.
Here’s one quick example: When designing trusts, people often make the mistake of giving too much power to the wrong person—typically by naming a close relative as Trustee.
Here’s a common trap: If you give your brother (or your child) unlimited control over a trust, the IRS may say, “Hey, that person owns the assets.” Result? Those assets get included in their estate, not yours.That’s often a tax disaster. One that can wipe out 40% or more of the value of the trust overnight.
The workaround? Get an Estate Lawyer who knows what they are doing, who may advise, for example, using an ascertainable standard like health, education, maintenance, and support (HEMS). This language is gold with the IRS. It keeps control in the right hands while avoiding tax landmines.
But like I said, plenty of lawyers get this wrong. They write trusts with fuzzy language that opens the door to court challenges and IRS scrutiny.
Bottom line? Get a savvy lawyer like those at CunninghamLegal to guide you. Then, be very careful who you name as Trustee and what powers you give them. Contact us today.
Okay, now let’s move on to your kids.
How Do I Encourage Good Behavior Through My Trust?
You absolutely can encourage good behavior in the next generation with a properly designed Trust!
Start by considering options other than a lump-sum payout, depending on the character and circumstances of your heir. Would leaving a lump sum to this heir merely encourage partying in Ibiza?
Should you, in fact, create a trust that’s a roadmap for personal growth? That would mean:
- Setting goals
- Reinforcing your values
- Rewarding responsibility
- Encouraging grit and self-sufficiency
Start by making a list of what values matter to you: hard work, education, community service, entrepreneurship, and so on. Then structure your trust to support those values.
For example, you can design a trust to:
- Match a child’s earned income dollar for dollar
- Provide funds upon college graduation
- Offer help with a down payment—on completion of financial literacy training
- Release funds only after maintaining sobriety for 12 months
These are not punishments. They’re guardrails. They help keep your heirs on the right path. You can further define that path by creating a “Letter of Intent” to give the Trustee guidance without locking them into legal obligations. More on that in a minute.
What Is an Incentive Trust?
An incentive trust makes distributions conditional. It turns a passive inheritance into an active challenge. Does your teenage heir want $100,000 for a new sports car? Graduate from college first. Want your annual dollar-for-dollar match? Earn income and file your taxes. Want startup capital? Present a business plan that looks promising. Want continued support? Stay clean, employed, and sober.
Incentive trusts can be tailored for almost anything: education, career milestones, charitable work, military service, caregiving, or personal development.
You can even reward family unity. For example, some clients fund annual family reunions—the trust pays travel expenses to keep relatives connected. Others fund multi-generational philanthropy.
But speaking from experience, keep it simple. Don’t over-engineer your incentive trust. A trust shouldn’t feel like a maze of hoops and hurdles. That can be demoralizing and diminish motivation. The goal is to inspire growth, not micromanage it.
Should I Put My Incentive Conditions in My Trust or in a Separate Letter?
Whether to write a set of conditions in the trust documents or in a separate letter is a great question. And here’s the practical answer: It’s a good idea to keep the detailed stuff out of the trust document.
Why? Because when you die, your kids (the Beneficiaries) are entitled to a copy of the trust. If it says, “You must do XYZ to get money,” they could lawyer up and challenge it or find a way around the restrictions.
But a separate letter to the Trustee? That’s guidance, not a legal contract. It’s harder to litigate. And it gives your Trustee the flexibility to apply your values with judgment and discretion.
Think of it this way: The trust says “may” instead of “shall.” The letter says, “Here’s what I would do if I were still alive.”
And it works. We draft these letters all the time. They inform and empower Trustees, clarify your legacy, and reduce the odds of courtroom drama.
Who Should I Choose as a Trustee for My Trust?
Who you should choose as Trustee is the million-dollar (or multi-million-dollar) question. And you do not want to get this one wrong. Let’s look at the requirements.
Your Trustee must:
- Understand your values
- Be willing to say “no” when needed
- Follow the trust instructions
- Keep accurate records
- Avoid self-dealing
- Communicate with transparency and professionalism
They don’t need to be your sibling, your best friend, or your oldest child. In fact, that’s often a recipe for disaster.
In many cases, a professional Trustee or an independent third party is the right move. Why? Because family members come with baggage and often hidden motivations. A neutral party doesn’t. And a pro knows how to navigate legal compliance, tax filings, and family dynamics.
If you do appoint a loved one, back them up with clear instructions, legal authority, and access to expert help. Trust Administration is a job, not a favor or an “honor.”
What About Using a Discretionary Trust?
A discretionary trust gives your Trustee the power to decide if and when to make distributions—and under what circumstances.
This is my personal favorite.
Why? Because life is messy. You can’t predict every twist and turn. A discretionary trust gives the Trustee flexibility to respond to real-life situations.
Let’s say your son decides to get a degree in marine biology instead of business, and he wants to study dolphin behavior in Belize rather than manage the family real estate portfolio. A rigid trust might say, “No, that’s not allowed because it’s not Harvard Business School.” But a discretionary trust? That Trustee could say, “Cool. That’s growth. Go for it.”
The key is choosing the right Trustee and giving them clear marching orders.
Discretionary trusts can also provide solid asset protection. Because the Beneficiary doesn’t have a guaranteed right to distributions, creditors and divorcing spouses have a harder time getting their hands on the money.
Should I Educate My Kids About My Trust Before I Die?
Whether or not you should go over the trust with your children before you die is an interesting and tricky question. The answer is… maybe. But maybe not. Some clients want total transparency. Others say, “I’ll let the Trustee handle it.”
Here’s the risk: If your child knows there’s a big pile of money waiting, they may stop striving.
One of my earliest clients asked if he should show his kids the Estate Plan. I said yes. Ten years later, he came back and told me it was the worst advice I ever gave. It started fights, jealousy, and entitlement.
So these days? I say, consider it carefully. Every family is different.
What is helpful is preparing your kids for financial reality, so consider the following:
- Teaching them the difference between stocks and bonds
- Introducing them to your financial advisor
- Encouraging budgeting and saving
- Sharing your values about money and work
That way, when they do inherit, they’re not learning the fundamentals of wealth and money on the fly.
Can I Help My Kids Financially Without Spoiling Them?
Absolutely. That’s the whole point.
But here’s the key: The best trusts supplement a child’s income and aspirations—they don’t replace them. You want your kids to say, “Thanks, Mom and Dad; this really helps”.
Supplementing a child’s income and aspirations might mean:
- Helping with a home purchase after they’ve saved a down payment
- Funding a business after they’ve done market research and shown they’re ready
- Paying off student loans after they graduate
- Providing childcare support so they can pursue a career
In other words, make financial support earned.
And remember: You can always reward values, not just achievements. Charity work, artistic passion, family caregiving—these all count.
What If My Child Struggles with Addiction or Bad Behavior?
If a child has a history of addiction, criminal activity, abuse, recklessness, or other destructive behaviors, a trust can really help. This is where discretionary trusts shine.
If a Beneficiary is making poor choices—substance abuse, toxic relationships, reckless spending—you don’t want them to inherit a windfall, because that windfall is likely to make the situation worse.
Your Trustee can withhold funds until the person seeks treatment, maintains sobriety, or meets specific conditions. And you can write those expectations into a Letter of Wishes to guide the Trustee.
This isn’t punishment. It’s love with boundaries. It’s you saying, “I want to help, but I won’t enable destructive behavior.”
And it can work. I’ve seen it work. I’ve seen young adults go to rehab, get clean, and go back to school—because the trust gave them both a cushion and a challenge.
What If I Want to Use a Trust to Promote Family Unity? Education for the Grandkids?
Promoting family unity and prioritizing family relationships and time spent together can be an important goal for a trust. How? Use your trust fund for shared experiences. Pay for annual family reunions. Cover airfare, lodging, activities. Make it fun. Make it meaningful.
Some clients set aside money for grandchildren’s education, others for legacy projects like family foundations. That way the trust becomes more than a bank account—it becomes a mission.
And here’s a tip: Consider holding family meetings once a year. Share values. Celebrate wins. Review accomplishments and set goals for the coming year. Use your estate as a platform for generational impact.
How Often Should I Update My Trust?
You should update your Trust at least every three years. Or when some major life change or event happens:
- A new child is born
- Someone gets married (or divorced)
- You acquire or sell major assets
- Your values shift
- Tax laws change
- Your named Trustee moves, dies, or declines to serve
Trusts are living documents. Treat them that way. Let them evolve with your family.
An outdated trust is like a ten-year-old map. It might still work, but you’ll probably get lost.
Contact CunninghamLegal today to evaluate your existing documents and help you update your Estate Plan.
Final Thoughts: What’s the Legacy You Want to Leave?
Here’s the big question. What do you want your money to do when you’re gone?
Do you want it to free your kids? Or trap them? Help them become the very best versions of themselves they can be? Or live life on Easy Street without a worry… or perhaps without a goal… in the world?
Whatever the answer is will determine how you structure your trust. Do it thoughtfully. Do it with guidance. And do it with the knowledge that you can pass on not just your wealth—but your wisdom.
That’s the real legacy.
What We Do
At CunninghamLegal, we help individuals and families prepare for some of life’s most important—and often challenging—moments. Our experienced attorneys guide clients through comprehensive Estate Planning, Tax Planning, Business Law, and more, offering trusted advice when it matters most.
We proudly serve clients across California with flexible appointment options, including in-person, phone, and Zoom consultations. To schedule a meeting, call us at (866) 988-3956 or book online at your convenience.
Many of our clients also rely on our free legal webinars for insights on critical topics like Estate Planning, retirement, taxes, trusts, probate, California residency, and asset protection. These sessions are designed to be both accessible and actionable.
We look forward to helping you protect your legacy and plan for the future.
Warm regards, Jim
James L. Cunningham Jr., Esq.
Founder, CunninghamLegal
We guide savvy, caring families in the protection and transfer of multi-generational wealth.
