Is an Incentive Trust Right for You and Your Heirs?

What do you do when you want to bequeath your children and grandchildren your money, but also wish to ensure that they don’t spend it all on ski vacations in the Swiss Alps or their own private island in the Caribbean? Some people are using incentive trusts to prevent their heirs from becoming “trust-fund kids” with no incentive to work and make something of their lives.

Incentive trusts can be set up with any number of stipulations. Most require that the recipients finish their education and obtain employment. Some require the beneficiaries to complete their college education in a specific number of years, get a minimum grade point average, and/or participate in charitable work or low-income but socially significant employment. Some people who have heirs with addiction issues earmark the money solely for rehabilitation facilities.

Financial experts disagree on the value of incentive trusts in instilling one’s values in future generations. Some see them as a way of “saying what behavior you want, and aligning the incentives,” as one wealth management professional puts it. Others see them as fraught with unintended consequences, particularly if they are too specific. One estate planning professional says she is seeing “a significant uptick in giving nonbinding instructions to the trustees.”

Some estate planning professionals warn against making the conditions too specific or personal and allowing for unexpected circumstances like disability. One notes that courts may rule against requirements involving marriage or divorce if the requirements are challenged. Another trust professional notes that the problem with highly specific incentive trusts is that they can’t anticipate the future. She says that an incentive trust “should be an expression of intention, not a mandate.”

Many people of means subscribe to Andrew Carnegie’s words of more than a century ago. He said that “the parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would.” However, it’s best to discuss your wishes and goals for your family after you are gone with an experienced Florida estate planning attorney who can help you draw up a trust that will reflect your values while helping to ensure that your family is cared for if unforeseen circumstances arise.

Source: Barron’s, “Incentive Trusts Can Keep Your Heirs Motivated” Amy Feldman, May. 17, 2014