Estate Planning Law

What Is An Incentive Trust?

Financial mogul Warren Buffet once said about leaving an inheritance to children that the perfect inheritance is “enough money so that they feel that they could do anything, but not so much that they could do nothing.”  Finding what is the “perfect inheritance” is a tough needle to thread. 

Wouldn’t it be great if there were a financial instrument that allowed you to have some control over your children when it comes to their inheritance.  It is an age-old struggle for parents to try to get their kids to do what the parents want. If you are a parent and know how hard it is to get your children to do something when they are little, then you know all too well how hard it is to get them to do something when they are adolescents or even adults.  

Indeed, we have all read it in books, and seen it in movies.  There is that common plot of threatening your offspring with disinheritance unless they follow through with something the parents really want them to do – get married, become a doctor, clean their room.

Well, there is a financial instrument that has become a very popular point of discussion for many advanced estate planning professionals.  It is the incentive trust.  Because it is such a hot topic, we will devote this blog to all the basics you need to know about incentive trusts.  

As you will learn in this blog, incentive trusts are tricky legal instruments to draft and execute.  Therefore, if you want to get a professional to help you understand the options you may have using an incentive trust, do not hesitate to contact us at Doane & Doane.  We are attorneys who are laser-focused on our clients, and we have vast experience with regard to all types of estate planning tools, including the incentive trust. Thus, call us today at 561-656-0200 and set up a free consulation with a Doane & Doane attorney professional.

The Incentive Trust, What Is It Exactly?

As the title suggests, an incentive trust is a financial trust that provides an incentive for someone to do something.  More specifically, you create a trust that holds money for your kids, or other beneficiaries, to inherit. But the inheritance is conditional.  It is conditioned on the beneficiary doing, or not doing, something that you desire.  

Thus, if the beneficiary engages in the desired conduct, then he or she receives the inheritance.  If he or she does not, then they do not get any money. Some might call this a legal form of bribery, but really, what parent has not bartered to get their kids to do something as simple as pick up after themselves . . . right?

Why Create an Incentive Trust?

Of course, the simple answer to that question is to have control over the person receiving the money you place in the trust.  But, philosophically speaking, there are bigger issues there.  

Many of Doane & Doane’s wealthier clients are genuinely concerned about giving too much inheritance to their children such that it will spoil them.  Indeed, clients have told us that, after they pass, they do not want their children to work less hard or “rest on their laurels” because they know they have a large inheritance available to them.  They care about their children enough to want them to make personal achievements and strive to be productive members of society.  

We have all read about the children of very wealth people who achieve fame both for their immense wealth and because they did very little to obtain that wealth.  Therefore, many people – of various income brackets – wish to not have their children only live lavishly on their inherited wealth.

So, What Types of Incentives Can I Place In Such a Trust?

When it comes to the types of incentives that you can draft into a trust, the choices are only limited by your imagination.  There are some trusts that simply have a “statement of philosophy” which is a general philosophy that the grantor of the trust desires for the beneficiaries to follow.  

By contrast, there are other incentive trusts that are extremely specific.  There may be people who will place on condition on beneficiaries that they complete college, or that they obtain a job.  Of course, one can contemplate some trust grantors will want to condition an inheritance on a child not marrying a particular individual, or going into a specific profession – like medicine.  The trust conditions could relate to anything from religion, to location where a beneficiary will live. Again, nothing really limits the incentives allowed.

Are Incentive Trusts Hard to Administer?

Yes.  In fact, they are similarly hard to draft as well.  Because there are very subjective variables that go into the conditions a grantor has for the beneficiary, it takes careful work to make sure that the specific conditions requested are properly drafted into the trust document so that the grantor’s wishes are correctly expressed.  

On the administration side, it is also a challenge to make sure that the grantor’s conditions are followed.  A trust must be administered by a “trustee.” With incentive trusts, the trustee has the obligation to do what is necessary to make sure that the beneficiary is following the detailed conditions so that he or she may receive the inheritance.  Making the determination is often difficult for the trustee, and places a lot of discretion into their hands.

For example, a trustee needs to determine whether a particular school fits the “graduate college” condition in an incentive trust.  Or, better yet, what does a trustee do when an incentive trust is conditioned on the beneficiary obtaining employment, but an economic recession makes that particularly difficult.  In sum, those variables and the responsibility to make judgments on whether conditions are followed makes being a trustee a much more difficult task than normal.

Do Incentive Trusts Work?

The answer to that question is both yes and no.  When it comes to simpler conditions, like “graduate college,” the inheritance that comes at the end of a course of study may be just what is needed to get a beneficiary through those last few classes in school.  

However, if a beneficiary suffers from an addiction problem, conditioning money on that person pulling away from the source of the addiction may not be effective or sufficient.  There are so many factors that go into why someone suffers from an addiction, a conditional promise of an inheritance might not be the tool that can do the trick.  

Ask Doane & Doane More Information about Incentive Trusts

There are so many options now on how to make the most of your money, it is worth it to talk about which options are best for you.  Call the experienced trust and estate planning attorneys at Doane & Doane by calling 561-656-0200.