Most parents do not want their child to be rich
At first glance, this statement may seem exaggerated. Most parents naturally want their children to live in safety, receive a good education, be able to set up a home of their own, and not have to face the financial difficulties that may have defined their own lives.
Yet, in discussions about the transfer of family wealth, an apparent contradiction regularly arises. Parents are often willing to spend a considerable sum on their child’s education, accommodation or business venture, yet they become far more cautious when the possibility arises of handing over the same amount directly, without any restrictions on how it is spent.
The difference does not necessarily lie in the amount of money involved. Funding a university place abroad, a flat in Budapest or a start-up business can easily amount to a sum that a parent would otherwise be reluctant to place at their child’s free disposal. The decisive factor is rather that, in the first case, the parent knows what the money is being spent on, whereas in the second case, the decision on how it is used rests solely with the child.
Financial support and the transfer of assets are not the same thing
When providing financial support to a child, the parent typically funds a specific purpose. This could include education, the purchase of a first property, medical expenses, or the launch of a properly prepared business venture. In such cases, the money is not provided in its own right, but as a means by which the child can get ahead.
In contrast, the transfer of the entire estate entails not only a financial advantage but also extensive freedom of choice. The beneficiary can decide for themselves whether to spend the money, invest it, lend it, put it into a business, or even make it available to another person. A larger sum therefore does not simply ensure a higher standard of living, but also creates decision-making situations which not everyone is automatically prepared to handle.
Parental uncertainty therefore cannot usually be attributed to the parent not loving their child or fundamentally not trusting them. More often than not, it is because they cannot foresee what situation their child will find themselves in five, ten or twenty years’ time. A poorly chosen business partner, a bad investment, a deteriorating relationship or even a lasting external influence could pose a significant threat to the transferred assets.
Another common concern is that financial independence acquired too early will affect the child’s motivation and independence. Parents generally do not want wealth to replace the need to study, work and forge their own career path. Rather, they expect it to provide a safety net and opportunities, whilst the next generation continues to set their own goals.
Age is not necessarily the deciding factor
The problem cannot be simply solved by ensuring that a child only gains access to the wealth once they have reached a certain age. The mere fact that someone has turned thirty, thirty-five or forty does not necessarily make them capable of managing a substantial fortune.
Maturity and financial responsibility vary from person to person. It may be the case that a younger family member has been involved in the running of the family business for some time, has their own income, and has gained sufficient experience in making financial decisions. In other cases, even an older child may show no particular interest or aptitude for managing the family’s assets.
When planning the transfer of assets, it is therefore advisable to take into account not only age but also life circumstances, financial experience, the role played in the family business, and the purposes for which the family member in question wishes to use the assets provided to them.
The transfer of assets need not be a one-off decision
In traditional thinking, parents face two fundamental options. Either they gift the assets to their child during their lifetime, thereby transferring the right of disposal, or they retain them, and the assets are subsequently passed on to the next generation through inheritance.
However, in many cases, families’ actual needs do not fit neatly into these two extreme solutions. Often, the aim is not to ensure that the child receives no share of the assets at all, but rather that the transfer takes place gradually, in accordance with specific criteria.
For example, a family may decide to support a child’s education and accommodation without restriction, but to provide funding for their own business only on the basis of a suitable business plan. It is also possible for the beneficiary to receive a regular sum, whilst larger payments are made only for specific purposes. Other families consider it important that the next generation should benefit from the income generated by the assets, but should not be able to draw on the capital itself without restriction.
These arrangements do not necessarily entail strict or inflexible restrictions. On the contrary: if structured appropriately, they can provide the family with the flexibility to adapt to changing circumstances, whilst ensuring that long-term goals are not compromised.
The role of trust management
One of the key functions of trust management is to separate direct control over the assets from the benefits derived from them. The settlor transfers ownership of the assets to the trustee, who manages them in accordance with the terms set out in the contract and makes payments to the beneficiaries.
A child can therefore benefit from the family assets without immediately becoming the direct owner of the entire estate. The settlor may determine the principles, purposes and timing of payments to beneficiaries, whilst entrusting the management of the assets to a pre-established system.
In practice, this may involve, for example, funding education, a first home or justified medical expenses. A regular income can be provided, or a procedure can be established whereby the beneficiary may apply for funding to implement a business plan. The arrangement may also be suitable for ensuring that children in different life circumstances benefit from the assets in various ways, without the system necessarily placing any of them at an unjustified disadvantage.
In a well-designed asset management system, the conditions are not punitive in nature. It is not a matter of prescribing in detail how a child should live, what career path they should choose, or whom they may marry. Regulations that are excessively rigid or extend to every area of life can easily become unworkable, particularly when designed to cover a period of several decades.
It is more practical to establish guiding principles that provide an appropriate framework for the asset manager’s decisions, whilst also allowing for the handling of unforeseen circumstances. The rules must both reflect the settlor’s intentions and ensure that the system serves the actual interests of the beneficiaries.
Control cannot be an end in itself
When setting up a trust, it is important to distinguish between the protection of family assets and the management of the next generation’s lives. The purpose of the arrangement is not for the parent to retain unlimited control over the child without any time constraints.
Excessive control can easily lead to conflicts and may also prevent the next generation from taking on genuine responsibility. If all major decisions continue to be made by the parent or a person appointed by them, the child will not necessarily learn how to manage the assets, but will merely enjoy the benefits.
Long-term wealth planning therefore usually includes preparing the next generation. This can be achieved by gradually involving them in the running of the family business, familiarising them with investment decisions , or ensuring that the child plays a meaningful role in certain matters even before the full transfer of the wealth takes place.
In this process, trust-based asset management does not replace communication within the family or financial education. At most, it provides a legal and organisational framework within which the gradual handover can be consistently implemented.
The aim is not to prevent the child from becoming wealthy
The statement in the title is therefore only partly true. Most parents do indeed want their child to have a suitable financial background and to be able to enjoy the opportunities afforded by the family’s wealth. At the same time, many do not want significant wealth to pass to the next generation too early, without preparation and without any restrictions.
The question is therefore generally not whether the child should receive a share of the wealth, but rather in what form, at what pace and under what decision-making framework the transfer will best serve their interests.
Properly structured wealth planning is not merely aimed at preserving wealth. It can also help the next generation to gradually learn to make the most of the opportunities available to them, so that, over time, they become not only beneficiaries but also responsible stewards of the family wealth.
Disclaimer: this article is a translation of our original article written in Hungarian, which you can find here.
