You know your children best, from the one most likely to succeed to the one most likely to make bad decisions. An incentive trust may be an option if you want to try to change their behavior patterns.
Sometimes, despite everything a parent does, they find themselves with adult children who simply cannot master financial skills.
What can a parent put in place so these adult children comply with certain requirements in order to receive their portion of the estate? You don’t want the money to be spent in the first six months!
The Norman (OK) Transcript’s article, “Incentive trusts can motivate your heirs to better themselves,” provides some information on how it works and some tips to help you create such an estate plan.
An incentive trust is an estate-planning tool used to help motivate your heirs in the direction you want after you pass away. Some or all of your assets are passed to your incentive trust when you die instead of directly to your heirs, like your financial disaster kids. The trustee has the power to distribute funds from the trust only if and when the beneficiaries perform (or abstain from) whatever goal or behavior you have specified in the trust. It can be something like encouraging a granddaughter beneficiary to graduate from college, reward beneficiaries who do charitable work, or supplement the incomes of beneficiaries who elect to go into lower-paying but meaningful careers like social work.
On the flip side, an incentive trust can be set up to penalize beneficiaries who don’t work by cutting off or cutting down their trust distributions. Some trusts will put restrictions on heirs with addictions by requiring that the payments go straight to the rehab facility.
You should also be aware that incentive trusts can have drawbacks. Poorly constructed incentive trusts can have a high risk of unintended consequences. For instance, you may want to set up an incentive trust that provides a financial incentive for beneficiaries to be employed full-time—but if one becomes ill or is seriously injured in a car accident and is unable to work, they’d be punished unfairly.
In addition, there are some legal limitations on what you can do with an incentive trust. Incentive trusts that encourage a beneficiary to join or leave a particular religion or seek a divorce may be challenged in court and possibly revoked.
Creating an incentive trust that will accomplish your goals for your beneficiary requires a thoughtful approach to be effective. Discuss what you want to achieve with your estate planning attorney. Include language that will grant the appointed trustees the right to use their discretion, and more specifically, that those decisions are final and binding. Circumstances change, and you want your trustees to have the right to make common sense decisions. Equally important, this language will be helpful in preventing beneficiaries from successfully challenging the trust or the trustee in court. Once a trust gives final decision making authority to a trustee, it becomes extremely difficult for beneficiaries to argue that the trustee is not correctly implementing the terms of the trust. Just be sure to select a trustee who understands your intention and is strong enough to hold their own if challenged by your beneficiaries.
Reference: Norman Transcript (November 1, 2016) “Incentive trusts can motivate your heirs to better themselves”
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