Kids and money: once a millionaire, always a millionaire?
Former NBA star Shaquille O'Neal once spoke at an NCAA convention, where he discussed how he spent his first million dollars within 30 minutes of joining the league.
His explanation? He was only 20 at the time and, having left college early to go pro, he was uneducated. O'Neal decided to become educated in money and finance, and he went back to school and got both a bachelor's degree and an MBA. Most recently, he received a doctoral degree in education.
Now an educated and more mature man, O'Neal is an accomplished businessman who makes millions of dollars a year in investments, business and commercial endorsements. Quite simply, the addition of education and maturity made all the difference.
Many people would agree that 18-year-olds are seldom ready to handle that kind of money. Not only might they spend it irresponsibly, but the possession of the money itself might remove the incentive to be hard-working members of society. And many teenagers I know — including me back in the day — need no incentive to be lazy.
This situation is precisely what causes many parents who have substantial assets to create trusts for their children. Trusts are legal instruments through which people can control the disbursement of money after their death.
For example, a parent could create a trust that would provide for the living expenses of the children until the age of 25 and then give control of the remaining sum to the children. This course of action can help parents provide for their children while also encouraging them to be healthy adults.
Even for parents without assets to necessitate such a system, one can see why creating a trust might be a good idea. Imagine your teenagers with millions of dollars. Scary, right? My own parents would agree.
Unfortunately, even for parents who take precautions to make sure their children are not given a fortune on their 18th birthday, this result can still occur in Michigan.
This is because of wrongful death awards. Generally speaking, a wrongful death award is the money your surviving family is given if you are killed by someone else, often in an accident.
The theory behind wrongful death law is that your spouse and/or children are deprived of whatever future financial support you would provide, along with the loss of your companionship. Accordingly, the responsible party must compensate your family.
A problem can arise, however, if both parents die as a result of the same tragic event, such as a car accident. With no parents left behind, any sum of money awarded to the children is entirely their property.
Michigan law provides a way to handle a wrongful death award for children under 18. The money can be placed with a court-appointed person who will manage it for the minor's benefit.
However, Michigan law does not state clearly what happens when the child reaches 18. There is no law giving Michigan judges authority to create a trust to manage the funds beyond the age of 18 unless they suffer from some disability. There is also no law stating that the judges cannot create such a trust.
The lack of clarity in Michigan law has led some judges to conclude they have authority to create trusts that extend beyond the age of 18. Other judges believe they do not have such authority.
This split among judges need not occur. Some states explicitly allow creation of a trust that extends beyond the age of 18 following a wrongful death award. For example, Ohio allows a judge to create a trust that will hold the award until the minor reaches age 25. In this way, the child is provided for out of trust distributions but is not asked to handle a large amount of money until reaching a more mature age.
Ohio law aside — and since no express authority exists for Michigan judges — what can be done?
The first step would be an estate plan that includes a will. The responsible thing to do as a parent is to make sure that, in the unfortunate event that you pass away, your assets provide for your children. In particular, you should lay out a careful plan of how you want that done — a plan that should probably include a trust extending beyond your child's 18th birthday.
A trust is a great way to provide for children while keeping a lump sum of money away from them until they are ready to use it wisely.
Even if you think, "Giving my 18-year-old a large lump of cash will never be an issue," you can still take precautions.
Leave statements in your will as to your wishes in the event that your children receive a wrongful death award. That way, a judge who may have authority to create such a trust will know what you want for your children.
Finally, you can contact your local state representative. The way to truly make sure your wishes are carried out if your child receives a wrongful death award is to make the laws clear so that judges know they have authority to create a trust.
I realize this is not a pleasant topic, but neither is the thought of the 18-year-old version of me wreaking havoc with a cool $5 million in my pocket.
Benjamin Anderson is an associate with the law firm of Varnum LLP. He can be reached at email@example.com.