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Using a Trust to Control Heirs from the Grave

MP900442387An incentive trust makes it necessary for your heirs to follow certain paths in life. Make sure it’s done correctly and that you pick the right trustee to make it work.

More than one person has said they don’t want their kids to be spoiled by a large inheritance. However, there is a way to leave money to heirs in such a way, that they have to attain certain markers, like graduating from college or staying clean from drugs or alcohol, before receiving part of their inheritance.

FEDWeek’s recent story, “Using a Trust as an Incentive for Your Heirs” explains that trust distributions can be limited to modest amounts or left to the discretion of the trustee, who’ll manage the trust assets.

That’s because at those ages, most people are better off finishing their education and establishing their careers. Giving them a bagful of money at that age, might decrease their drive to pursue a meaningful career.

One way to do this is what’s called an “incentive” trust. This type of trust offers rewards to trust beneficiaries who accomplish specific goals.

With an incentive trust, the beneficiaries might get a particular amount of money for getting higher education degrees, attaining certain levels of earned income or volunteering at a church or in the community. For instance, your trust could be drafted by your estate planning attorney to state that the trustee will distribute to each of your grandchildren a certain percentage (such as 25%) of earnings each year, up to a certain amount. This could be tied to a requirement that you make.

Another way to go about this trust, is to leave the distributions to the discretion of the trustee. The trust might detail the types of activities that will be rewarded, then permit the trustee to make appropriate distributions.

When you’re going to depend so much on the judgment of the trustee, for this type of arrangement to work, it’s critical to choose a highly-qualified trustee.

This may be an instance where a professional trustee makes sense, as they are less likely to be swayed by the emotional drama of an heir. However, you could select a friend or a relative for the task, as long as they are willing to take on the responsibility. Make sure to name a successor trustee, in case anything happens to the primary trustee. If you know your heirs are going to be problematic, it’s only fair to make sure the trustee is prepared.

Reference: FEDWeek (January 17, 2019) “Using a Trust as an Incentive for Your Heirs”