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Incentive Trust: A Tool to Encourage Your Children’s Good Behavior

Good behaviorWhat can a parent put in place so 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!

What if you have adult children that are—to put it kindly—financial disasters? An incentive trust is just the estate-planning tool you need 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.

To create a comprehensive and effective incentive trust that does all that you want, tell your estate planning attorney what you want to accomplish and he or she can draft the right provisions. However, you should also add in language granting your trustee the right to use his or her discretion and that the trustee’s decisions should be final and binding. This allows your trustee to make common sense decisions, reducing or eliminating the chances of unintended and inequitable results. It also makes it harder for beneficiaries to successfully challenge the trust or trustee in court. When a trust gives final decision-making authority to its trustee, it’s just about impossible for beneficiaries to successfully argue that the trustee is failing to implement the trust’s terms.

Reference: Norman Transcript (November 1, 2016) “Incentive trusts can motivate your heirs to better themselves”

 

 

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