Let’s be honest, some of our kids just aren’t ready to handle large sums of money (like their inheritances)…
Under these circumstances, you might consider making these particular family members the beneficiaries of an incentive trust.
Useful Guidance
To implement an incentive trust, you’d fund the trust and name a trustee to act as the administrator. Any competent adult who is willing to assume the role can technically act as a trustee from a legal perspective. However, you want to engage a trustee who has the financial acumen that it takes to administer this type of trust.
Since discretionary decisions will be made, you should make sure that your trustee does not have a personal relationship with the beneficiary that would cloud their objectivity. Many people who are in this position will use a professional fiduciary like a bank or a trust company to serve as the trustee.
When you use a corporate trustee, you can rest assured that the assets will be handled in accordance with professional standards. There will be no conflicts of interest or heartstrings that can be tugged at, and there would be no longevity concerns. Plus, there would be inherent organizational oversight.
Getting back to our example about a young inheritor…In the trust declaration:
- You could allow for living expenses and tuition to be paid while the beneficiary is in college.
- The distributions for expenses could be contingent upon consistent school attendance with good standing.
- You could allow for a lump sum distribution at graduation.
- You could include incentives that would guide the beneficiary toward graduate school.
- To foster a work ethic, you could instruct the trustee to match every dollar that is earned by the beneficiary going forward.
- The trustee could be given the latitude to provide larger distributions when the beneficiary reaches certain age thresholds.
- This is just one example of how an incentive trust can be used to provide for a family member in a constructive manner, but there are infinite possibilities.
For example, you could use this type of trust to encourage a loved one to avoid self-destructive behavior like substance abuse. In a real sense, you can include any stipulations that you want to as long as you are not requiring the beneficiary to break any laws.
An incentive trust can be the right choice for some people, but be aware of the potential for ongoing resentment. Someone who is given an inheritance with all these strings attached may get angry and rebel. This may be highly unlikely, but it is something to keep in mind.
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