Is it possible to create an incentivizing trust without demotivating? Typically, the goal of a trust is to pass on assets in the most efficient manner possible. That may mean avoiding estate tax, probate, confrontation, or a combination of all three!
However, how do you pass along the intangible intention of the assets? What about the lessons, values, and opportunities you want to go with the financial assets?
While a will-based transfer usually does not restrict the transfer of assets, trusts may contain various provisions that direct the distribution of assets.
- Outright Distribution – This is the most common type of wealth transfer.
- Staggered Distribution (e.g., 1/3 at age 30, and so on) – This is also a popular method, although it delays the beneficiary’s receipt of the assets (which may be the point).
- Discretionary Trust – This provides discretion over timing and standards to be met, such as health, education, maintenance, and support).
Are Incentives Important to You?
Although the goal is usually to maximize the estate, the intent of the wealth transfer is rarely to demotivate the beneficiary. If you want your wealth intentions to outlive your legacy, consider the following incentives:
- Academic achievement provisions (e.g., attaining a particular grade or GPA).
- Specific life event (e.g., a down payment on a home, a wedding, or starting a business).
- Income matching provisions – Do you feel like the beneficiary needs “to earn it?” The beneficiary may be required to submit their W-2 to the trustee to receive a distribution.
- Volunteer hours (e.g., attaining certain hours in a specified period).
- Name children as successor grant advisors of their parents Donor Advised Fund. This allows the beneficiary to direct the distribution to the charity of their choice.
Tools to Protect Against Bad Behavior
- Withholding provisions – The trustee may withhold a distribution if the beneficiary engages in self-destructive behavior (gambling, substance abuse, etc.).
- No contest clause – This prevents the beneficiary from taking legal action to contest the grantor’s wishes.
- Utilize a third-party trustee – This may enhance the level of discretion utilized and avoid contentious behavior. It may also be the most expensive route!
Some Questions to Consider
- What do you hope the beneficiary will do with the money?
- How financially responsible is the beneficiary?
- Do you have any reservations about the beneficiary’s maturity or behavior?
- Do you think the beneficiary will be disappointed in what they receive from you?
The Role of Side Letters
Many of these provisions may result in added costs to your estate plan. Therefore, consider accompanying your trust with a side letter to the trustee as a more economical approach to creating an incentivizing trust. Although considered an informal document, it lays out your wishes and describes your priorities in executing the trust. This may alleviate the discretionary burden on the trustee while making your wishes known.
The letter lacks formalities and isn’t considered legally binding. However, the trustee may appreciate the guidance. The language permits more flexibility and avoids personalized trust drafting.
When To Draft An Incentivizing Trust
Even though you may hope to instill personal anecdotes over your lifetime, you may want to be sure that your values are passed on to your beneficiaries. Broaching these topics in the early stages of estate planning may be the best method to preserve your legacy for future generations.
We’re happy to connect you with an estate planning attorney to collaborate on this. Feel free to book some time with us here.
Please consult with your financial advisor and/or tax professional to determine the suitability of these strategies. All views, expressions, and opinions in this communication are subject to change. This communication is not an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.