Much is written about the role of estate planning and the “hand from the grave” – Trusts that “rule” after the death of the person establishing the Trust.
First, let’s review some legal terminology for the sake of this article:
The person establishing the Trust is known in legal parlance as Donor, Settlor, Trustor and in some cases also the Trustee.
The Trustee is the individual(s) or institution/entity administering the Trust. The Trustee is responsible for carrying out the terms of the Trust.
(Usually, the Trustor and the Trustee are different entities, but in some cases they can be the same entity.)
The Beneficiary is the person(s) who will receive ‘something’ from the trust (money, land/property, art work, etc.) In short, the Beneficiary ‘benefits’ from the Trust – now or into the future.
Now that we have some simplified legal terminology in place — what happens if a parent or grandparent wants to make a bequest to a child/grandchild, but that child/grandchild is not quite reliable?
The Beneficiary may suffer from conditions such as an addiction to alcohol, gambling, gaming, narcotics, etc. – or they may just be unprincipled with money or have poor decision- making skills.
ENTER…the Incentive Trust… a trust that may encourage good habits; motivate in some way; prevent ‘misuse’ of inheritance funds; reward ‘good’ behavior (or at least behavior in line with the Trustor); and assist loved ones to make better decisions for the long term.
But, and there is always a ‘but’…the Incentive Trust is ‘tricky’.
Money can sometimes be the means of destruction, particularly for those with addictive personalities.
But the withholding of funds is equally difficult.
Incentive Trusts, like all trusts, must be structured with great care if the Trustor is to obtain the outcome they anticipate. They should have the labeling – “Use With Care”
Take one simplest example of an Incentive Trust –
A grandparent establishes an Incentive Trust for their grandchild. The grandparent really wants the grandchild (the Beneficiary) to graduate college. So they state that the grandchild, in order to receive his/her Trust funds, must graduate college. So far…simple.
But…what about grade point average? Which accredited college? Does an On-line college qualify? Length of time to graduate (4 years or twenty years)? Will the type of degree matter? Where are the funds to attend college coming from? Will payments for college be made to the Beneficiary or directly to the college? How much discretion will be given to the Trustee (the person or institution administering the Trust)? Will there be benchmarks? How many different colleges can the Beneficiary attend (how often can they change colleges?) How many courses must Beneficiary take each semester? Can the Beneficiary marry and have children while attending college?
Well…You get the idea. Simply stating for Trust purposes that the Beneficiary must graduate college….is not nearly enough of a directive. Such a lack of directive can leave much to the discretion of the Trustee.
Likewise; preventing bad behavior is equally fraught with serious questions.
An example: a child is addicted to drugs; to gambling; or to alcohol. The parent wants that child to be provided for (under the terms of a Trust.)
What precise behavioral changes will qualify for the child (the Beneficiary) to receive their funds from an Incentive Trust?
What if the child ‘substitutes’ one addiction for another?
Will child be required to submit to periodic drug testing? Help programs?
What specifically would ‘qualify’ as alcohol abuse or gambling?
How long will the child be required to remain drug free?
At what age, if any, will all Trust funds be given to the Beneficiary? Or should funds be administered as a monthly ‘stipend’?
If the child cannot keep to the terms of the Trust, what happens to the funds in the Trust?
Will the Trust provide for ‘intervention’ or help for the child to cope?
Is an Incentive Trust the best trust vehicle for every circumstance? As with many things…the devil is in the details.
A qualified Estate Planning attorney is probably the best ‘investment’ that you can make when establishing a Trust – if you want to achieve the outcome that you anticipate in the future.
Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” –Ayn Rand
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