Sometimes people want to
leave funds to their children, but they are concerned that their kids may not
be responsible enough to manage them. Other parents or grandparents wish to
ensure that inherited funds will not change the lives of the beneficiaries such
that they will become “lazy” and not have the same work ethic as the older
generation.
To address this concern, funds are often distributed at certain ages, such as 1/3 at age 30, 1/3 at age 35, and 1/3 at age 40. For other families, where the children are already somewhat older, but perhaps the parent is not fond of the in-laws, the funds can be distributed at intervals such as 1/2 upon the death of the parent and 1/2 five years later, but not exceeding a date later than the child’s attaining the age of sixty-five.
Some parents and grandparents are concerned about education, moral and family values, business and vocational choices, and charitable and religious opportunities. In these types of situations, a person may want to establish what is known as an incentive trust that allows the grantor of the trust to reward heirs for their desired behavior. There may also be penalties imposed for undesirable activities.
These trusts may be used to provide extra support to the heirs who pursue advanced degrees or focus on family life by providing income for the family so that both parents will not have to work, and at least one may stay home raising the children until the children attain a particular age. There may also be a trust to provide funds to the heirs who are committed to maintaining the family business, and additional financial support may be provided to those beneficiaries who work in a field that is not as lucrative as others such as social service, teaching, etc.
Finally, some family members may wish to encourage behavior by requiring specific observances such as religious or charitable opportunities, so that if a person is involved in a particular cause, such as being a missionary, the trust fund will provide them with additional support for themselves and their families without having to worry about requesting additional funds from the trustee on a periodic basis.
When setting up an incentive trust, it is very important to be sure that the trustee is aware of the intentions of the grantor, and therefore possibly should be given specific authority within the trust and possibly even a letter of intent from the donor as to when and how much funds shall be distributed, in addition to the usual provisions such as having all income distributed with principal at the discretion of the trustee. It is also important to be sure that one does not violate any constitutional or public policy law or standard that would cause the trust to be violative of a statue or regulation.
In short, it is easy to discuss the establishment of an incentive trust, but there are significant and complex legal, tax, and investment issues that will also arise when creating this type of document. It is certainly not for everyone, and it should be used only in those situations where other types of trusts or investment vehicles may not be appropriate.
Hyman G. Darling, Esq.
Photo credit: Takver under Creative Commons license
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