One of the most difficult issues in estate planning is what to do about heirs who may need something like a parent’s guiding hand long after they become adults. A child or grandchild may have a mental illness, a problem with substance abuse, or chronic trouble holding a job. Helping such a person by giving them money may in fact be harmful, by enabling bad or self-destructive behavior. One possible solution for such dilemmas is what’s known as an incentive trust. This gives the trustee power to enforce provisions that encourage desired behaviors – or penalize the heir for failure to meet a certain standard.
The Greater Wilmington Business Journal article, “Trusts Can Include Incentives For Heirs To Act Responsibly,” says that this is different from situations in which a person with a disability, or the beneficiary of a settlement as the result of an accident, is cared for through a trust.
You must use great care when creating an incentive trust.
Attempting to control too many aspects of an heir’s life can be counterproductive: it’s called trying to “rule from the grave,” or making an inheritance conditional. Examples of “incentives” include completing a certain degree or entering a certain line of work that may not be in line with an adult’s actual talents or aspirations.
Nonetheless, where a clear pattern of negative actions exists, the right incentives can encourage an heir to make better life choices.
It’s important to be realistic. The promise of inherited money may not be enough to overcome a pattern of severe substance abuse, so the threat of giving the inheritance to charity if specified incentives aren’t met might be needed.
It may be a good idea to attach age restrictions.
If you have a kid who is irresponsible with money, a trust might be structured so that s/he will not have access to the estate’s principal until a certain age. Some trusts set up staggered distributions, at specified ages, to keep them from burning through their inheritance right away. Another way to encourage a responsible lifestyle is to distribute trust funds on a matching basis. That might be dollar for dollar, based on what the beneficiary earns on his or her own. This is known as a “work ethic” clause.
Another sort of incentive clause could specify that the trustee wouldn’t distribute any money until the heir showed an ability to handle the funds. For someone with an abuse problem, this could be enforced by requiring the beneficiary submit to random drug testing. Failure to comply could result in the assets being distributed to alternate beneficiaries, like charities.
Instead of just disinheriting a child or grandchild, an incentive trust can work as an escape clause. It might just help to get someone who’s struggling to turn his or her life around.
Contact a qualified elder law attorney to help you create the appropriate incentives for your unique circumstances.
Reference: Greater Wilmington Business Journal (November 1, 2015) “Trusts Can Include Incentives For Heirs To Act Responsibly”
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