While many families like the idea of freeing their children and grandchildren from the pressures of financial anxiety, most would rather not spoil them in the process. Instead of leaving cash and stocks outright, many are using trusts to control the disposition of family assets by future generations.
Focus on the future
Family incentive trusts—with specific requirements for how and when money can be disbursed—offer innovative strategies for distributing wealth while passing on the family’s work ethic to the next generation. As with all trusts, incentive trusts are legal entities that hold and manage assets for the grantor or for the benefit of another person. Their special appeal is in providing some reassurance that heirs will be motivated to achieve financial independence beyond their trust payouts.
Parents can specify almost any rules they want, reflecting their desire for their heirs to seek higher education or to set up a successful business. For example, parents, grandparents, or other benefactors can stipulate a payout when the heir graduates from college. Parents who place a high value on education may consider additional payouts for completion of graduate degrees. Some trusts allow beneficiaries to withdraw money to set up a business. They can link payouts to the amount a beneficiary earns, thereby creating an incentive to work.
Since many trusts cannot be changed once established, they should be written with a degree of flexibility to accommodate changing circumstances and unintended effects. For example, requiring gainful employment could punish stay-at-home parents who are living responsibly and raising their children.
Choosing the right trustee
The individual or financial institution entrusted with the duty of managing assets placed in trust is the trustee. Choosing a trustee is an important part of drafting a trust, as trustees have the fiduciary responsibility to act in the best interest of the trust’s beneficiaries, while carrying out the wishes of the donor. In other words, a trustee must be able to administer the trust with the highest degree of honesty, integrity, and objectivity. Experienced trust advisors are held to a standard of providing responsible ethical conduct, careful exercise of discretionary powers, competent investment management, expertise in tax and legal matters, and continuity in the administration of the trust for its duration.
A trust with multiple advantages
A family incentive trust is as flexible as the grantor wants it to be. Whatever the individual variations, incentive-based planning can help prevent children from getting a free ride in life or blowing an inheritance on bad habits. To effectively accomplish the grantor’s goals, trusts must be properly structured and must comply with federal and state requirements. Investment decisions require sufficient knowledge and intelligent deliberation, so it is important to seek the counsel of trusted advisors, including trust officers, attorneys, and accountants.
If you believe that incentives are essential to assuring financial responsibility, then an incentive trust may be an estate planning tool to consider.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.