Dec 23

Encouraging Behavior with Incentive Trusts

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Virtually all parents have at some point worried about their children’s future choices in life, whether they be educational, career-related, or moral.  This article will describe how some parents use “incentive trusts” to try to nudge their children toward a certain path in life, long after the parents are in the grave.

There is no question that a large inheritance can transform a young person’s life, positively or negatively.  Bill Gates and some other tycoons from his generation are so concerned about the potential of a large inheritance to destroy their children’s will to work, that some are severely limiting the size of their children’s inheritance, giving the majority of their fortunes to charity.  But it is not just technology billionaires that have to worry about the effect of a sudden windfall of money for their children.

Even an inheritance of $100,000 could be a lot for a 19-year old to handle all at once.  This money, put to good use, could fund a college education or provide capital to start a new business.  On the other hand, it could also be used to for an expensive car, luxury handbags, or even drugs.  In this way, the money could actually stunt a young person’s development, rather than assist it.

One way parents try to prevent their money from corrupting their children is through incentive trusts.  After the parents die, their money is held by a trustee for the benefit of their children.  In a typical setup, the trustee will only be permitted to distribute money to the children if they cross certain life hurdles.  For example, trust documents often state that children must earn a bachelors degree before receiving their share of the estate.  Other trusts might require a child to work a full-time job for a number of years to receive their full share.  The possibilities for trying to control children’s behavior are almost limitless.

There are many tools available in incentive trusts.  Some trusts encourage children to pursue high wage careers, for example by matching every dollar earned with a  dollar distributed from the trust.  Other trusts might encourage a child to pursue a career in charitable work, possibly providing a large stipend for every month spent working for a charitable organization.  A trust could also encourage a struggling child to turn his or her life around, perhaps paying out money if a child completes a course of drug rehabilitation.  As noble as many of these goals sound, there are downsides to incentive trusts.

Incentive trusts carry risks.  One risk is that you will fail to foresee  your children’s future needs, in spite of your best intentions now.  For example, you may perceive that your son will need some motivation to finish college in the future, and restrict his inheritance unless he achieves a bachelor’s degree in four years.  However, after your death, your son may discover a health condition that needs his immediate attention, which is more important than graduating college in four years.  Perhaps your son will get an incredible offer to take a break from college to work with a profitable internet startup, causing a conflict between what is best for his professional development and what you planned in your trust.

An incentive trust may cause deep resentment in your family, as your relatives feel they are being controlled from the grave.  Additionally, some types of incentive trusts may be unenforceable in court, if they violate public policy.  Examples would be trusts that encourage divorce or require a child to marry someone of a certain religion.

For the reasons listed above, incentive trusts are attractive to some parents, but carry significant risk.  Consult an estate planning attorney about these and other methods, like spendthrift trusts, to ensure your children’s inheritance actually helps them in the way you intend.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

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