Many parents and grandparents look at the way their children and grandchildren manage their financial lives and shudder. In some cases, this is simply a matter of the older generation disapproving of the way the younger generation spends money because it is not how they spend their money. In some cases, there is real cause for concern when thinking about a particular person inheriting a substantial sum of money. We counsel clients frequently about how a trust is an excellent way to safeguard a child’s inheritance from the reach of creditors and from the child’s own bad judgment. A so-called ‘incentive’ trust takes this idea a bit further by using incentives to encourage specific desirable behavior or discourage a particular bad behavior. For example, a trust maker may stipulate that a beneficiary will receive distributions from the trust only if she graduates from college or remains employed for a certain period of time. Similarly, an incentive trust may condition distributions on the beneficiary remaining drug-free for a certain period of time. A recent trend has trust makers including a requirement that a beneficiary complete a course of education in financial management as a prerequisite to the beneficiary receiving a distribution or being permitted to serve as Trustee of his or her trust share.
For those for whom an incentive trust seems intriguing, keep in mind that it is vital to build in flexibility. For example, if the trust maker wants to encourage higher education by making distribution of the funds to the beneficiary conditional on the beneficiary graduating from college, it is important to acknowledge that college is not for everyone. If the money in the trust is intended to be used to pay for a beneficiary’s college tuition, then the trust maker may want to condition those payments on the beneficiary maintaining a certain grade point average or limit payments to 4-years of college. The trust maker should also specify what will happen if a beneficiary does not graduate from college – will that person receive nothing? Will she receive a smaller amount?
When including incentives, the trust maker should be aware that there are laws that make trust provisions that violate public policy unenforceable. For example, a provision in a trust that stipulates that a beneficiary will only receive a distribution from the trust if she divorces her spouse will not be upheld if challenged as a number of courts have found promoting divorce to be against public policy.
If you are interested in ‘incentivizing’ your beneficiaries, give us a call to schedule a meeting with one of our attorneys to discuss your vision.
© 2017 Samuel, Sayward & Baler LLC