The Gap Between The Rich and the Poor Is Mostly About Education (or the Sad End to a Trust Fund)

Hence why I continue to advocate pushing the age of majority to 20. You are not a fully developed adult at 18, especially in the world we live in today. This is a decision of a child, not an adult. Perhaps he would have made the same decision in 2 years, but at least he would have 2 more years of cognitive development.

I still can't get over the absurdity of the fact that someone is forced to pay taxes as a minor, despite not having voting representation, can go to war at 18, be given a fully automatic weapon, and told to kill people, despite not being able to drink alcohol until they are 21. Oh, but they can get married as early as 12 in some states. Our majority age laws in the United States are completely messed up and inconsistent.

Personally, the biggest problem I see with our age of majority laws is the government charging children as adults when they commit crimes. Below is a link to a story where prosecutors in Pennsylvania were seeking life without parole for a child who was accused of murdering a woman when he was 11 years old.

http://www.wsws.org/articles/2011/jan2011/penn-j28.shtml

Why do we even bother having special statutes for children if we just throw them out whenever the district attorney feels like it?

This kind of reminds me of the situation with the Native Americans. Every month they get a huge check from the government and many of them spend it on drugs, alcohol, etc It's gone within a week and they live in poverty until the next one. Knowing you never have to work again is good for someone that realizes that at age 30, but not for someone at age 18

While your point is valid to a certain extent, I wouldn't call the money Native Americans get from the government "huge" by any means. The Bureau of Indian Affairs (under the parent agency of the Dept. of Interior) administers trust payments to registered tribal members in the U.S., and the annual budget for BIA is approximately $2.5B. The trust fund that is used to pay out monies to tribal people has approximately $500M at any given time. There are approximately 2.5M tribal people in the U.S., according to Census data. If you do the math, even if every cent was paid out of the trust annually to each eligible tribal member - which it is not - and if every cent of the BIA budget was used for payouts as well - which it is not - this figure would still total only $1200/Indian per year. I would hardly call this a "huge" sum of money, and this is in fact larger than what many individual Indians see in a calendar year anyway. This is a broad oversimplification of how tribal people get money from the government, and the amount each receives, but you get the idea that we are talking about extremely small sums of money here - a few hundred dollars here and there, if that. Tribal governments also receive small amounts of assistance from the government to administer in certain ways, depending on the tribe, the money, etc.

This is also not addressing the larger issue of BIA mismanagement of tribal trust funds on the order of several billions of dollars over the last 100+ years through shoddy accounting (see Cobell v. Salazar).

Most tribes live in economic conditions that could only be described as deplorable.

This is not to say that many tribal members do not spend government money on drugs/alcohol - many do - but I would strongly suggest a lot of this spending stems from the fact that tribes in the U.S. have gotten the shaft of all shafts from the government over the last 200+ years, live in some of the most desperate circumstances imaginable, and have literally no economic escape hatches or resources available for meaningful economic development. I suspect many rational humans would resort to the drink if placed in similarly dire circumstances. And, based on personal experience working with tribes, I have not seen any of the "I'm set for life" mentality among tribal folks. Quite the contrary.

Given your unique perspective working with Native American tribes, what do you think, from your own personal observation, is the single greatest causal effect resulting in the higher rates of poverty?

In Canada, I would say that 6+ generations of cultural genocide (it's a strong word to use but what else would one call the systematic, targeted destruction of a specific culture/way of life of a group of people) leaves a wound that is very hard to overcome.

Not that it is impossible to overcome, but I think if you've been beaten down all your life (and for many generations prior) and told you are worthless/pathetic/scum, you are not in the most constructive environment to flourish. Inevitably, there will always be the rare individuals who can overcome and break out, but the group as a whole is left pretty dysfunctional.

I think the social support networks are too broken, there is no strong family system to lean on, and you learn and imitate the poor behaviour around your immediate environment.

Having travelled 1,800 miles through the American Southwest, including Kansas, Colorado, New Mexico, Oklahoma, and back to Missouri over the past five days, I have to say I was shocked at the level of abject poverty on the Native American reservations. Intellectually, it makes no sense to me. If I had the advantage of the legal structures provided to certain tribes, I'd have turned the tribal casino into one of the biggest holding company in the United States. It may take me 50 years, but I could do it. The profits would fund investments in everything else and I'd organize the tribe as a co-op, like the HyVee Grocery store chain, where every member was an equity holder in proportion to an agreed upon earnings division.

There is so much opportunity due to the treaties Congress struck with the sovereign Indian nations.

Joshua,

I know several times in previous articles on this blog, you've mentioned that you do not believe in leaving a terribly significant inheritance for one's heirs - perhaps a few thousand dollars a year, as a Christmas gift, but nothing that would alter their lifestyle too dramatically. I agree that such behavior has the potential to lead to an inefficient allocation of capital in a society if it runs rampant, with no checks or balances.

All the same, I hope to leave a considerable financial legacy for my future descendants. I'd be interested in hearing your thoughts on balancing the trepidation that you've expressed in the past about capital allocation within a society, versus the utility (real or perceived) that the creator of the wealth in question realizes by leaving a financial legacy.

If I, as a creator of wealth, decide that my utility curve indicates that I should donate a marginal dollar of income to a trust fund for the benefit of my heirs in a jurisdiction that has abolished the rule against perpetuities (set up so that principal could not be withdrawn, ever) rather than buying another Ferrari, couldn't one make the argument that leaving such an inheritance becomes an efficient allocation of capital? If giving my heirs billions of dollars in perpetuity provides me with more marginal utility than any material purchase (or charitable donation) available, then wouldn't doing anything else with that dollar be inefficient by definition?

Like you said in this post, "People vote with their dollars. They don’t always vote in ways we like
(as Jon Stewart pointed out, there is a market for cocaine and
hookers), but it is the only fair way to run a society; giving people
individual freedom to live how they want, even if we don’t think it is
rational."

Thanks.

"If giving my heirs billions of dollars in perpetuity provides me with more marginal utility than any material purchase (or charitable donation) available, then wouldn't doing anything else with that dollar be inefficient by definition?"

Yes. Absolutely. If society has some sort of readjustment mechanism (e.g., an inheritance tax or some sort of trigger so that you couldn't get a tyrant who inherited $100 billion and never blow through it all, buying politicians and changing laws), then your own utility would justify such a course of action because you acknowledge the reality that your heirs may waste every dime. If you're okay with that, and it still gives you more joy than spending the cash or some alternative use, then, yes. It is a completely rational allocation of capital based upon your own personal opportunity cost. It motivates you, inspires you, and rewards you for your contribution to society. When you're gone, capitalism will take it from there if your kids end up like Huntington Hartford, arguably the worst heir in the history of the world. If they don't, all the better. Who knows? They may end up using the money to fund a research lab that cures cancer. These things aren't predictable.

It is too bad that the grown-ups in that young man's life kept him ignorant about money and it's uses so that when he turned 18, he did what just about anyone who's never had money would do.
The gap between rich and poor is indeed mostly about education, but it's education about one single thing: the use of money, whether as a means or as an end.
The young man's problem is not that he was too immature to learn about what he could do with that fund, but rather that of that "series of trustees," not a one of them could be troubled to take and 8- or 10- or 12-year-old and show him what his money was doing and how it did it.
Instead the boy was allowed to grow up knowing no more about money than a ghetto kid.
Good job.

It isn't the trustees' fault because the background of the trust is ... complicated. It involves an unexpected pregnancy, marriage, death, and social class divides. Their hands were tied in a lot of unusual ways. Given the constraints and history of the trust, I think the trustees did the absolute best they could under very trying circumstances. The beneficiary just won't listen to them. He is young and foolish, convinced they are trying to keep him from "his money". They try to talk sense into him now that he is an adult and knows of the existence of the money but he has no interest in anything they say.

Joshua,

I am interning at an accounting firm who deals with high net worth individuals and it is amazing to see what happens when a trust is made up of multiple members. These "trust fund babies" cry foul at the smallest of indescrepencies. I've literally heard my boss get into shouting matches with clients who are wanting to take out money to purchase a new home in full. And these trustees are only making barely enough to scrape by if they didn't have the benefit of the trust fund. It's also funny to see if one member of the trust takes a large distribution out, the others almost always follow suit. The sad part is that most of these funds were set up by parents who were doctors and professionals who donated most of their life to serving others. These are people who would donate thousands to hospitals and charities alike. Unfortunately their children don't see life the same way. It's their money though and they can do what they please. Capitalism at its finest.

Stories like this make me think that the most intelligent thing a parent could do would be to take advantage of Charitable Annuity Trusts, donating a large sum to a 501(c)3 that provides a stream of income to the child until he or she dies, then uses the money for its own operating budget. That way, there is no principal to raid, you can't ruin the 3rd and 4th generations, and the money goes to a good cause, while simultaneously providing significant increases in living standard for the children.

I don't understand the idea that if a sibling does something stupid, you should too. Had I been a beneficiary in a shared trust, who cares if my siblings took out a distribution? As long as the trust terms were favorable on the capital participation allocation front, I'd keep my portion of the capital in the protection of the trust structure.

I suppose another solution is to provide individual trusts for each child so that there is limited sibling rivalry. They wouldn't even know each other's trust fund balances and each person would deal with the consequences of their own gains and losses, stupid and wise decisions.

P.S. I realize I'm probably overstepping my bounds here but when you go to find an employer, be careful about working for someone that screams. The act of yelling at someone in the workplace is inherently irrational and driven by emotions. If someone can be pushed to that limit easily, or frequently, are they really the type of person to whom you want your economic wagon hitched? It's a personal call; you'll know what is right for you. Making money is important, but you shouldn't have to put on battle armor to show up to work everyday.

Hello Joshua, I just discovered your blog recently, and have been enjoying reading through the archives.

I find it rather mind-boggling that a young person could come into a trust of this size, yet apparently not have received the necessary financial education to make sensible use of it. I don't want children myself, but if I did, I don't think I'd give them access to something like this until age 30 at the earliest.

I'm embarrassed to admit it, but if I'd received such a trust at 18, I probably wouldn't have managed it any better than this person. I come from a working class background with no positive financial role models, and the first decades of my life consisted of one horrible financial choice after another before I finally 'woke up' in my 30s. I'm not blaming my family for any of this; my bad decisions as an adult are entirely my fault, and I should have taken the intiative to learn about money management and investing (and especially about the power of compounding) at an earlier age. But sometimes those of us who aren't naturally inclined in that direction end up learning the hard way, and for this reason I think that financial education should be part of the school curriculum, since so many
parents seem unwilling or unable to provide it.

I agree that financial education should be taught in schools alongside math and science. As far as real-world practicality, for the typical family, it has far more importance than a specialized knowledge such as advanced organic chemistry.

Couldn't it be argued that committing an adult crime, such as murdering your fathers' pregnant fiance, results in the practical equivalent of emancipation-by-action?

A case in point is the infamous murder of British toddler James Bulger. The two year old was shopping with his mother when a couple of ten year old boys, Robert Thompson and Jon Venables, walked away with him, took him to a railway line, tortured, mutilated, and murdered him. There were also allegations of sexual abuse. The two ten year olds were seen on security cameras selecting a victim, looking for an opportunity to take a younger child. They stalked, preyed upon, and murdered, in cold blood, the younger child for sadistic pleasure.

The two murderers were released and given new identities, free to go on with their lives, because they committed their crime as children.

To me, that is an unacceptable failure of the justice system. I think they should have been summarily executed. Basic decency and justice demands it. The intent was there, and that is what counts.

For me, either you have the law, and make a distinction between minors and adults, or you don't. I see it as an unacceptable violation of equal protection for matters like this to be left up to prosecutorial discretion (if you do it in ABC County, you're tried as an adult, but if you do it 2 blocks south in XYZ County, then you're tried as a kid - how is this fair?).

In a 2005 case called Roper v. Simmons, the Supreme Court ruled that the death penalty violated the 8th Amendment when sought in cases where the defendant committed the crime while still a minor (regardless of the age at which s/he would actually be executed). Personally, if you want to throw out the juvenile standards all together, and try every as an "adult" then I likely wouldn't object to that - I could easily make the case that drawing some arbitrary line in the sand between being 17 years, 364 days old and 18 years old exactly is a failure of substantive equal protection.

But if we, as a society, want to draw that line int he sand between minority and majority, then we should enforce it in all circumstances, not just whenever we feel like it. To be subject to the full force of the law, without ever having been given the opportunity to weigh in politically is outrageous to me. In this country, we once had a revolution about being subject to laws in which we had no say - how is it that we are so willing to subject our children to this same fate now?

From a structural standpoint, those are compelling arguments.

Emotionally, I may not like them, but intellectually, it is hard to find fault with a system that allowed either solution you propose (consistency either way to remove the arbitrary nature of prosecutorial discretion).

I'm not sure which of the two I'd prefer (strengthening or removing the juvenile standards) because I would need considerable time to weigh the pros and cons but yeah ... you got me. I can't find any rational objection to your fundamental argument given the consistency such policy would bring to the overall justice system.

The only counter-position that might be applicable is the thesis that the overall functioning of the courts, by necessity, must tolerate some degree of failure of justice in a minority of court cases to produce the most efficient net benefit, but even then, that would be a heavy burden to prove. Even if it could be proved, there are the moral and ethical questions that would need to be resolved.

I tend to err on the side of strengthening the protections for juveniles (if you couldn't guess...). Pragmatically, I don't want 2-year-olds to be able to vote in meaningful elections. We draw the line in the sand because we have to draw it somewhere, and 18 is where everyone has more or less agreed is good enough.

As such, given that I reject the notion that people should be subject to laws in which they have no input (to the extent practicable), I see the most viable option as being to enforce that distinction as a bright line. Certainly, I'm not saying that 17 year-olds should be above the law; merely that it is fundamentally unfair for society to claim on one hand that a child does not possess the mental capacity to vote on how society should be run, while on the other hand protesting that s/he is perfectly capable of thinking as an adult when it comes to the most serious parts of life.

If you are not mentally capable of serving on a jury, how can you be fit to stand before one? Many communities get to elect their judges directly - but when the judge gets to preside over those to whom he is not accountable, our system of checks and balances is effectively thrown out the window.

Pragmatically, our courts must have some power to deal with underage offenders, but to subject them to the full force of the law seems inhumane. There's a reason kids have been treated with kid gloves. It's fair that obligation under the law should be proportional to one's rights to change the law. It's why I actually don't have a problem with setting the drinking age at 21: 18-, 19-, and 20-year-olds are free to vote to attempt to change the law if they don't like it. As I've said before - if you want to treat everyone the same, I'd be happy to entertain that, so long as you extend rights and obligations equally.

Is this kid doing allright so far?

If you are not born into wealth, is it possible to create a trust fund for yourself?

You mention: "With the money in the trust, especially with the spend-thrift provision that makes it nearly impossible for creditors to seize in the event of a bankruptcy, he could have a source of wealth that was beyond the reach of banks and credit card companies if he ever experienced a personal catastrophe. It’s an absolute dream solution if you are interested in long-term financial security."

How do I tap into that magic for myself if there are not others who came before me that did it?

Also, my best friend is having a child soon, and I was looking into possibly setting up a $500-$1,000 trust of Coca-Cola stock for his child as a present upon his birth. Is there a cost effective way to do this? I've been reading the Kiss Trust website, but it still seems cost ineffective. That leads me to think it may not be doable with small sums like that, which is a shame, because a gift of 25 shares of Coca-Cola might mean something forty years from now.

I remember reading a study that claimed that a person must make $75,000 a year to be happy.

I wasn't given a trust fund such as this one, but I was given time. Instead of productive things I have taken that time to enjoy video games. Now $15,000 a year is the most I've ever made, and I have little hope that I'll ever be able to "pull in" $75,000 yearly. The opportunity cost of seeking enjoyment is my current and future happiness.

Thank you for your profound lesson. At first I was so frustrated and angry but I realize that because of the decisions I've made I am no different then this guy.

I remember reading this post some years ago, and I just stumbled upon it again while searching for another one of your articles. Now that a few years have passed, can you give us an update on what happened with this young man? I think it would be highly instructive to see how things have turned out.