The gift announcement, which is carefully phrased to sound more like charity than tax planning, is posted on Instagram. For their two-year-old, a famous parent has established a trust. When it appears in the entertainment media, the number is substantial. A few million dollars. More at times. The typical spectrum of responses may be found in the comment sections, including adoration, criticism, jealousy, and the rare query about whether a toddler really needs that much money. Why a two-year-old is the receiver of a financial instrument whose main benefactors are frequently the parents is something that the comment sections hardly ever discuss.
A celebrity toddler’s trust fund is doing multiple things at once, and the child’s wellbeing isn’t always the top priority. The United States maintains a lifetime gift and estate tax exemption at the federal level; transfers of wealth are not subject to federal tax below this amount. In the past, this exemption has been generous under certain regimes and subject to reduction under others. The financially sensible course of action for wealthy families who think that future legislation may diminish the exemption is to use as much of it as possible now, at present rates, before the regulations change. Giving a two-year-old several million dollars is not primarily about the child. Moving assets out of the estate before Congress modifies the threshold is the goal.
In the long run, the compound growth argument is the one that actually helps the child. Before a child reaches adulthood, a portfolio of several million dollars invested at birth or in the early years of their life has decades to multiply. A few million dollars put in an irrevocable trust at age two grows significantly by the time the child is forty years old, assuming fair historical equity market return rates. The financial calculations are clear-cut. The runway is longer and the compounding effect is stronger the earlier the capital is invested.
Only estate planning lawyers are likely to speak fluently about the names of the structures used to accomplish these transfers. Irrevocable trusts completely remove assets from the parents’ estate, so when the parents pass away, neither creditors nor divorce settlements aimed at the parents can access those assets, nor are they subject to estate tax. Although they sound like the name of something that went wrong, intentionally defective grantor trusts are actually a sophisticated tool: the parent pays income taxes on the trust’s growth, which is treated as an additional gift to the beneficiary, allowing the principal inside the trust to compound fully without tax erosion. With Crummey trusts, parents can make systematic use of their annual gift tax exclusions while still having some control over the child’s real access to the funds.
This becomes unique to the entertainment sector in the area of intellectual property. Celebrities who own lucrative image rights, music royalties, or personal brand equity may put those assets, together with a share of their future earnings, into a trust for a kid. Then, instead of building up in the parent’s estate, the royalties from a music library or the licensing revenue from a personal brand are accumulated inside the trust. Financial planning is not like this. It needs lawyers who are knowledgeable about both entertainment law and estate planning, which is a specialty in and of itself. It also needs sufficient asset value to cover the initial setup and continuing administrative expenses.
The individuals involved are typically aware of the practical tension that exists within all of this. Large inherited fortunes that are passed down without accompanying financial education have a dismal track record of lasting beyond the generation that acquired them, according to fairly consistent data on wealth across generations. The same families whose estate planning lawyers are creating complex trust arrangements for young children are frequently considering how to make sure the youngster knows what money is, where it comes from, and the responsibilities that come with it. Not because a three-year-old can administer a foundation, but rather because the structure provides a framework for discussions about giving and stewardship that can begin younger than most families manage, some parents have created private foundations in their children’s names as early instructional tools.