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Home / Parenting from the Grave – Incentive Trusts

Parenting from the Grave – Incentive Trusts

When you sit down to discuss your estate plan with your
spouse and attorney, it is important to decide not only how your loved ones
will receive your assets, but also why.

Most of us choose to think that our heirs will be
responsible enough to handle any inheritance we pass down to them.  However, the reality is that many children
and young adults are not quite ready for the responsibilities and pressures
that come with inheriting any amount of wealth. 
A great way to ensure your heirs handle their inheritance responsibly to
implement guidelines by way of an incentive trust.  
An incentive trust is structured much like other trusts in
that it is set up by you, the grantor, for the benefit of another party, the
beneficiary.  The difference is that an
incentive trust is designed to provide distributions only once certain behaviors
and conditions are met.   In other words,
distributions have strings attached. 
Having string attached to the disbursement of assets is a powerful
motivation for young heirs.  
Almost any condition can be set in an incentive trust.  Your attorney can include various creative provisions
to meet many of the goals you have for your loved ones.  The only restriction imposed on the grantor
is that anything deemed against public policy (restrictions on marriage,
religious beliefs, for example) will not be legally recognized and will
therefore be void. 
For those who have concerns that an inheritance may pacify
the ambitions of heirs, incentive trusts present a solution to this problem.  A common tool utilized with incentive trusts is
to include an income-matching provision. 
Income-matching encourages heirs to be financially successful in their
own right, while allowing them to live comfortably above their earnings.  If you are concerned that a child may not
appreciate the value of an education, a grantor may dictate that college
tuition can only be earned when specific grades are achieved.  Some grantors chose to include regular drug
tests be administered to heirs before receiving their gifts, while others give
the discretion of that requirement to their trustee.
An incentive trusts retains the ability to devise outright
gifts without conditions attached.  In
other words, conditions are optional and do not need to be attached to every
disbursement made.  Grantors still have
the option for traditional gifts at certain milestones – upon graduation, as a down
payment for a house, etc..
In order for your incentive trust to be successful, it must
be drafted with some flexibility in mind. 
A well-written, yet inflexible document may result in the exact opposite
result you envisioned.  For example, what
if your child chooses to skip the traditional college route, but instead dreams
of attending culinary school, or a dance academy?  If your goal is to have your child educated
in whatever discipline they choose, having a rigid structure to the trust may
deny this.  Therefore, it is crucial to
have a trustee – whether it be a friend, family member, or third party like a
bank – in place who has the power of flexibility when performing their
fiduciary duties.  Appointing a trustee
with the power to exercise discretion over disbursement decisions may be the
best tool you can rely on to fulfill the spirit of the trusts.

In order for an incentive trust to achieve your desired
goals, it must be clear and concise without overstepping on individual
liberties.  Keep in mind that a document
that inspires your loved ones, rather than one that attempts to control them
will yield the best result for your family. 
 
Amber Louchart
Author: Amber Louchart

Amber is the proud mother to four beautiful children, Damian (27), Rosaleigh (14), Carlyn (11), and Naomi (8). Her family also includes four cats. She loves being a stay-at-home mom and feels blessed to be able to care for her children full-time and provide them with so many opportunities through Metro Detroit Mommy. In addition to Metro Detroit Mommy, Amber has a passion for hosting karaoke with Malibu Entertainment.  She enjoys the metro Detroit nightlife especially, singing, dancing and meeting new people.