Estate PlanninG

Motivate Your Heirs With an Incentive Trust

If you’re planning on passing on a sizable amount of money to your heirs, and you’re apprehensive about the effect it may have on them, you’re not alone.

Maybe you fear your recipients will misspend the money on things like flashy cars, failing businesses, or other things you might consider frivolous. Or maybe you’re afraid your children will simply lose their drive to achieve and overcome barriers if they know they have plenty of money to fall back on.

At the same time, it makes sense that you’d want to provide a safety net to your heirs and enhance their lives, especially in an increasingly insecure financial system.

One option is to leave funds for your descendants in a trust that distributes the funds at certain ages - say, one-third at age 25, one-third at age 30, and the rest at age 35. Some parents set up “incentive trusts”, which have very specific instructions to their trustees to support what the parents consider positive and productive activities. Such trusts may pay the costs of certain activities, like a college education or advanced degree, or provide rewards for achieving various milestones. Others may withhold distributions when the beneficiary engages in certain negative behaviors or activities, such as drug use or excessive spending.

Here are some ways incentive trusts might be structured:

  1. Rewards for degrees. Your descendants receive a cash amount for achieving a specified educational milestone.

  2. Matching earnings. The trustee would be instructed to match on a dollar-for-dollar basis the child’s earnings from employment or even the child’s savings.

  3. Paying for education. It’s not uncommon for grandparents to help pay for education, especially with the extremely high costs of private universities today. Some funds are more expansive than others in terms of what they will cover.

  4. Creating a charitable foundation or donor-advised fund. To encourage charitable giving among descendants, an estate plan could require heirs to give away a certain amount every year to a private foundation or to a donor-advised fund.

  5. Subsidizing public service career or Peace Corps. We live in an increasingly financially insecure world that often forces people to take or stick with careers they don't find fulfilling or don't feel further the public good. Parents or grandparents could fund trusts that don't match all earnings, but just those they feel make the world a better place. This may be hard to define and will, of course, be different from fund to fund. It may include working for any not-for-profit -- though some are quite well funded -- or teaching or political organizing for certain causes.

  6. Distribution upon marriage or having a child.

  7. Matching the down payment for a house.

  8. Reward for a period of time being alcohol- or drug-free.

Incentive trusts could help parents and grandparents make sure their money goes to causes they support. On one hand, this approach can multiply the benefit of what they pass on. On the other, it may seem to some that the deceased is trying to continue to exercise control much too long after they’re gone.

Either way, an incentive trust must be carefully constructed to both ensure its terms are clear and that it doesn’t violate any constitutional or public policy law or standard. For example, in one case that ended up in the courts, grandparents set up a trust that withheld funds from any grandchildren who married outside the Jewish faith. Two Illinois courts ruled that the clause disinheriting the grandchildren was invalid because it was against public policy by placing a significant limitation on the grandchildren's freedom to marry.

If you are interested in creating an incentive trust, contact us today. Call Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton & the Tri-Valley area, at (925) 831-4840.

Read more about trusts:

You Can Parent Beyond the Grave: Common Trusts and How to Use Them

10 Types of Trusts: A Quick Look

Who Should I Choose As My Trustee?

The Importance of Including a Statement of Intent or Purpose in Your Estate Planning Documents