Wealth is difficult to amass but easy to squander … especially by those who did not earn it. Many parents – and grandparents – come to us asking how they can leave an inheritance to their loved ones without “spoiling” them. They want the fruit of their labors – the wealth they pass on – to inspire their loved ones to greater causes.
I was reminded of just how deadly access to wealth in the wrong hands can be as the last civil suit filed against Ethan Couch, a sixteen year old drunk driver, was settled out of court recently. Couch, who plead guilty by reason of 'affluenza', claims to remember nothing about the evening, when, more than 3 times over the legal drinking limit, he struck and killed 24 year old Breanna Mitchell and three other good Samaritans who had stopped to provide roadside assistance.
Incentive trusts, as they are sometimes referred to, can offer an opportunity to try and nudge younger generations to solid values, as explained in an issue of Palisades Financial’s “Sentinel.” By incorporating language that expresses your goals and family values to guide the Trustee when making distributions to beneficiaries can be a beautiful tool, they don’t always work as planned. Let me give you some examples. You could draft a trust that mandates certain benchmarks be accomplished before trust funds can be distributed to the beneficiary – say, graduate from college or get a full-time job, before some or all of the trust funds can be paid out. What if your child develops a disability, wants to become an ‘at home’ parent, or engages in a successful career in a trade that did not require college. As you can see, the problem is that rigid incentives may defeat your purpose. Some beneficiaries may not learn the intended lessons. More worrisome, however, is the beneficiary who does become the “good person” you hoped for but financially fails to meet the rigid benchmarks of the trust. If the trust is too rigid, it may not instill the values you had hoped, instead forcing a predetermined life-plan upon the beneficiary.
The key to a successful trust that includes incentives is to make sure the language of the trust reflects not only an awareness that change is inevitable but offers a solution when change happens. You should provide enough flexibility in your trust to ensure that its intentions are not thwarted; allow for the solid judgments of a Trustee to carry out the spirit of the trust.
While it can be a difficult balancing act, many have come to appreciate the power of using assets to instill good values; well worth the effort employed. Your best course may be to consult competent counsel and share your unique situation and your goals and work together to design a plan with the greatest chance of success for you and your family. We can help you with that; call us at 757-259-0707.
References: Shomari Hearn, CFP®, EA. Sentinel. Palisade Hudson Financial Group LLC. (June 17, 2011) “Do Incentive Trusts Encourage Responsibility?” and Julie Fancher, Dallas Morning News, (October 15, 2015) “‘Affluenza’ teen says he recalls little of night his drunken driving killed 4 people”.