Trust Fund Baby Syndrome: An Interesting Case

In the fall of 1997 I found myself in the spacious, many-windowed living room of a large home in a southern state I’ll call Florida, although that’s not where it was. I have also slightly modified some of the details of the family to protect their privacy.

Ostensibly, I was there to discuss more aggressive investment strategies for the family foundation, which for some years had been spending considerably more than the required 5% per year. It was only when I asked why the spending was so high that I found out what was really on the parents’ minds: their adult kids.

I sighed (to myself) and prepared to endure yet another how-did-our-kids-become-trust-fund-babies discussion. The son, I learned, was 29 years old, already divorced, and “worked” only in the sense that he was paid a fee by the family foundation to attend four trustee meetings a year. The daughter was 27, married with one child, separated, and also worked only for the foundation.

But at that point the discussion went off in an unexpected direction. The kids weren’t spending all the family’s capital on themselves at all. Most of that capital still sat at the parents’ level, and the small trust funds that had been set up for the kids—plus their trustee fees—allowed them to live only modest middle class lives.

What was going on was that the kids bitterly resented the fact that so much of the family’s capital was tied up in the family foundation. They were, in effect, taking their resentment out on the foundation, refusing to vote to approve grants in support of the family’s traditional philanthropic priorities.

The parents had, generously but foolishly, added the kids to the foundation board, and the kids’ two votes could cancel out any grant the parents wished to make. And since the board was self-perpetuating, there was no obvious solution to the deadlock. In order for the parents to get traditional grants approved, they had to bribe the kids by approving grants the kids advocated and of which the parents disapproved. There were, as a result, two completely separate and unrelated grantmaking programs going on—hence the overspending.

Since this was the first time I had encountered this new version of the trust fund baby syndrome, I wasn’t much help to the parents. I think I mumbled something about how a great many wealthy parents would be happy that their children were interested in issues outside themselves, regardless of whether the parents shared those interests.

But as the years went by, and especially following the Financial Crisis, I encountered this phenomenon more and more often, and gradually I came to recognize it as the traditional trust fund baby outcome in disguise. The old model had been modified in part by the radically different parenting styles that baby boomers and subsequent generations of parents had used, the parenting styles I discussed in last week’s post.

These new parenting styles, which tend to produce kids who are notoriously intolerant of other people’s opinions, ran headlong into a common estate planning strategy used by wealthy families. Any money a wealthy family leaves to charity in its will—typically, it’s left to the family foundation—reduces the amount of the estate that is subject to tax.

As the generations roll by, the family foundation receives more and more money and, since it pays very little tax (foundations pay only a small excise tax) it continues to grow, at least in nominal terms. But money left to the next generation tends to be frittered away in over-spending, poor investments, and, of course, income, capital gains, and estate taxes. The ultimate result is often a very large family foundation controlled by a mostly middle class family.

Imagine children growing up in such a family who would normally be traditional trust fund babies, spending down their families’ capital. Except in this case there is no family capital to spend down: it’s all in the foundation. What’s a poor trust fund baby to do?

All too often what the kids do is to treat the foundation as though it were their own personal slush fund that they can deploy in ways that make a mockery of the word “philanthropy.” Traditional trust fund babies never outgrow their childish selfishness, thinking it’s only their own personal interest that matters. And the new version of the trust fund baby is inherently exactly the same. They believe that their own personal opinions, personal ideologies, personal interests are the only things that matter and they design their grantmaking programs accordingly.

The notion that the world is a complex place, that other people have opinions and ideas that might have value, that doing grantmaking right is very hard work, none of this ever penetrates the hard shell of selfishness that is now focused on the foundation, rather than on their families’ personal capital. Same phenomenon, slightly different variety.

Having tackled the world of trust fund babies, modern parenting strategies, and newfangled trust fund baby varieties, we can now—finally!—turn our attention to the original topic of this series of posts: “the talk.” Stay tuned.

Next up: The Talk, Part VI