Focus on Finance: Motivate your heirs with an incentive trust

Question: I want to set up a trust for my son but honestly I worry about how responsible he would be with the money. Are there any “safeguards” I can put in place to ensure the money would last?
Answer: Like most Americans with assets that they intend to leave to their heirs, you have worked hard to accumulate what you have. And while you can feel good about leaving your designated heirs with a financial legacy, you may have some reservations about their ability to use their inheritances wisely.
One way that you help them to make the right choices is by establishing an incentive trust. This type of trust can provide financial rewards to your heirs for accomplishing certain objectives that you consider beneficial.
An incentive trust resembles other types of trusts in many respects; it is established and funded by a grantor. In this case, the grantor usually is an older member of the family who wishes to pass on some or all of his or her wealth to younger family members — as long as certain goals are achieved. This type of trust also can make specific provisions regarding distribution of trust assets to beneficiaries.
As stated previously, the main advantage of an incentive trust is that it allows the grantor leverage either to financially reward or punish behavior of the trust beneficiaries, within broad legal limits.
Conditions such as age, education, lifestyle choices and employment are fair game in terms of criteria for this type of trust. For example, an incentive trust can restrict access to its assets to family members age 25 or older, or increase access for those who earn a college degree. There could be a reward for carrying on a family business, or achieving some other personal or professional goal.
Conversely, destructive behaviors, such as gambling or drug addiction, can cut off trust assets as well.
However, if not written wisely, these trusts also can present your heirs with problems. Making unreasonable demands of your beneficiaries can lead to resentment and create other problems for them. For example, if the trust will only pay assets to an heir who is willing to continue the family business, then a beneficiary who happens to have other aspirations in life will be faced with what may be a rather substantial dilemma.
The key to successful incentive trust planning is flexibility. Remember that your heirs have their own goals and desires, which may never match up with yours. Choose the criteria for rewards and punishments wisely, and be sure to allow for contingencies, such as disability, or other misfortunes that could affect your beneficiaries’ ability to achieve the goals prescribed in the trust.
Steve Wright is managing member of The Wright LegacyGroup LLC.