Helping Family Businesses
Prosper Across Generations®


Party Time!

What would you have done if you'd received a fortune on your 21st birthday? Of course, I'm sure that I would have invested it. After all, I was born an accountant and probably always will be one. But, I do remember those heady college days when I was 21. . .

It wasn't long ago that a client called in a tizzy. Many years ago, a well-intentioned lawyer had encouraged him to make annual exclusion gifts to a trust for his son. Being an investment banker by trade, the client parlayed those paltry gifts into somewhat over a million bucks. The bad news was that the trust had to terminate and distribute to the son at age 21, although the son could elect to leave the money in the trust until age 30. The son was turning 21 the following month. And, sure enough, the son was enjoying fraternity life at a prestigious university. PARTY TIME!!!!

First, I feel obliged to explain that you won't have this dilemma if you raise fiscally responsible and obedient children. Oh, so now you tell me! I hear you exclaim with dripping sarcasm.

And, I could say, I told you so, because I have previously recommended that you not use custodial accounts or so-called minor's trusts that vest when the child reaches age 21. (For example, see my column in the September 2003 edition of The Family Business Advisor.)

But, none of us is perfect. This is a particularly poignant issue for me. My oldest son just turned 21. Through the years, my wife and I put some money into custodial accounts for him. With some care and luck, it turned into some meaningful money, at least by my son's standards. He's become a fine young man, but I just don't know how he might handle this news. Sometimes it seems that his life is a fragile balance between college and I'm not sure what. I don't want to risk tipping that balance the wrong way.

Don't Ask Don't Tell

So, one might be tempted to try to hide the money. Just don't say anything. It's not like the police or the SEC will come knocking on your door to force you to distribute the money from the trust or hand him a check for the balance in the custody account.

The problem is that the post-age-21 income must be included in his tax return, if it isn't already. What do you do if he starts asking, What are these big income numbers on my return and why don't I get the cash? (By the way, I would not suggest forging his signature on his tax return or reporting the income in your own return! You might find yourself rooming with Martha Stewart.)

You also must hope that nothing makes you change the title of the assets into his name. What happens if the broker, mutual fund, etc. asks for proof that you still have investment authority over that 29-year-old minor's account?

Tie It Up

You could use your power as custodian or trustee to invest the money in a family limited partnership before the kid turns 21. That way, instead of cash and stocks, he would receive a limited partnership interest that no self-respecting Maserati dealer would accept as payment.

However, you need to understand that a particularly confrontational child could try to overturn this strategy. Can't you just hear a plaintiff's lawyer questioning the appropriateness of a custodian or trustee investing in an illiquid, non-controlling partnership interest? And, your honor, the trustee/custodian had the audacity to make that ill-advised investment just days before my client was to receive the funds that were his legitimate right! We demand that the partnership disgorge the funds to my client and that the custodian/trustee be surcharged [penalized] for this egregious action that violated every fiduciary principle on the books!

Resort to Threats

Then there is the ever-trusty sledgehammer approach. Leave the money in the trust and let me take care of managing it for you. There's plenty more where that came from. If you want any of the really big bucks, you better do what I say with this little piece of the pie.

Any of these approaches can work, subject to the kinds of risks I mentioned. But, there is one more issue. Do you really want to lie to your children? Is being sneaky really in their best interests or in the interests of a healthy relationship with your children in the long-term?

You very well may need to resort to one of these approaches if you really think that giving the kids the money will cause them to quit school, retire to the beach, or to drink, snort, or shoot-up their way to oblivion.

However, for most kids, there is another way. Stay tuned for the solution in next month's issue.





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