Passing Values, Not Just Money, via Incentive Trusts

It's one of the deepest felt concerns. How can you pass your values onto your children and grandchildren even if you pass away earlier than you expect?

Letters, family trips and treasured memories are one way to leave a legacy, but what about your assets?

When you die, your children and grandchildren may want to hold onto some of those more sentimental assets as heirlooms and reminders from the times you spent together. However, receiving large sums of money or expensive items can tempt your children or grandchildren away from the values you instilled.

How can you leverage what you leave behind to further instill the values you espouse? How can you better ensure that the money isn't wasted and doesn't ruin your loved one's lives by creating so-called "trust fund babies?"

To help make certain that inheritances are given to the people you want, it's vital that you have an estate plan; however, If you're really concerned about how your loved ones will use your assets after you've passed away, especially if your loved ones are younger than 30, you may want to use an "incentive trust."

Holding Assets "In Trust"

Most wills typically distribute or give assets outright to a beneficiary or heir.

You can include admonitions and advice about how the assets should be used, but since the assets have already been given, your beneficiaries can use their inheritance as they please, which may include totally disregarding or ignoring your objectives and intentions. Beneficiaries who receive assets outright are typically not bound by restrictions or controls, unless they agree to those restrictions or unless the assets were not actually given to them.

To avoid the risk of beneficiaries taking advantage of a large inheritance, you can opt to have assets held assets "in trust." When assets are held in trust, those admonitions and advice are gospel. They must be respected and complied with in order to receive property or funds from the trust.

When you set up a trust, you designate at least one trustee. This person is then instructed on how to make distributions of property or funds from the trust. Unless otherwise noted in the terms of the trust, the trustee cannot make distributions. The trustee is the ultimate decider, in conjunction with the terms of the trust, of when a beneficiary will receive the assets or funds.

What is an Incentive Trust?

The theory behind an incentive trust is this: a trust beneficiary will only be entitled to receive funds or property from a trust if they do those things required by the trust; because of this, they will do those things required by the trust. You select the specific requirements in order to instill the values of you want to pass on.

For example, a trust can include provisions that call for either a percentage of the trust assets, a specific amount of money, or specific property to be distributed to a beneficiary when the beneficiary reaches a particular milestone. The following are milestones often used in an effort to instill values:

  • Obtaining an undergraduate or graduate degree
  • Getting married
  • Having children
  • Being involved in social causes

If a person wants to convey and communicate the importance she places upon education, she can specify that the trust beneficiaries will only be entitled to receive property or funds from the trust if they graduate from a 4-year university. However, if they don't, they either receive a smaller inheritance or they may not receive anything.

An Exception

There is one major exception to incentive trusts. If the conditions or restrictions are harebrained or against public policy, courts can refuse to enforce them. For example, a person probably cannot require that a beneficiary marry a spouse of a specific race as a condition to receiving property or assets from the trust.

What About Unforeseen Circumstances?

One potential issue with utilizing incentive trusts in your estate plan is this: not accounting for unforeseen and unexpected circumstances. What happens if your child gets into a car accident and is seriously injured, either physically, mentally, or both? What happens if she is diagnosed with a disease? What happens if she needs money for something vital, such as her health?

The provisions of the trust can and should account for these circumstances. If not, your good intentions can be thwarted. That's why it's critical that you and your attorney think through the possible consequences of each particular requirement in an incentive trust.

What Can You Do?

Protecting your family and instilling your values even after your death is a top priority. If you're concerned about how your assets will be used, an "incentive trust" might be a good solution. Contact an attorney to discuss the details, provisions and trustees so there is no question about your intent after you pass.

Steve Cook is an estate planning attorney in the Phoenix, AZ metro area. He advises clients about strategies to achieve the their objectives through estate planning.