An Inheritance With Guidance (Published 12-2018)
Most of us would like to think that our children and grandchildren could handle a sizeable inheritance. The statistics say otherwise. Some studies show that most inheritances are totally gone within 18-24 months of receipt. This is regardless of the age of the recipient and regardless of the size of the estate!
The truth is that every child and grandchild is different. Some would be able to deal well with a large inheritance while others would have great difficulty. Depending on their personality and habits, money can be the best thing or worst thing that ever happened to them. The good news is that you can structure an inheritance that comes with some guidance for your beneficiaries. That will help them make the best use of the money they receive.
Inheritance Through A Trust
When you leave an inheritance that is accompanied by instructions, it is typically done in the form of a trust – in this case, an “incentive trust.” The key difference between an incentive trust and other types of trusts is that rather than provide for outright distributions, the trust assets are used to encourage or discourage certain types of behavior in your beneficiaries.
For example, let’s assume that you believe your children should be rewarded for choosing a public service career. This might mean a career as a teacher, social worker, missionary, pastor, or other types of employment that contribute to the public good but traditionally have not been very high paying. You could design an incentive trust that would make distributions to your heirs from the trust that matches every dollar they earn in public service; thereby doubling their income.
You can encourage and reward higher education by limiting use of some inheritance for college, graduate school, or trade school. You can even have the Trustee distribute bonuses based on the grades earned.
If you want to encourage an entrepreneurial spirit, you could allow the Trustee to provide financing for a business start-up or the purchase of a franchise.
From a protection perspective, you could use incentive trusts to help a child or grandchild escape drug or alcohol dependency. Your instructions could allow the Trustee to use funds for rehabilitation and recovery programs, but limit other uses during a period of dependency.
Build in Flexibility
One of the potential concerns with an incentive trust is the resentment that can be caused if your heirs feel you are controlling their behavior from beyond the grave. On the other hand, the money is yours to do with what you please. It is not something to which they are entitled.
Of course, incentive trusts require flexibility. If goals for behavior are set unreasonably high, the trust becomes a source of discouragement rather than encouragement. And sometimes it’s the grandchild who drops out of college that creates Microsoft!
Think about how you could use the trust to reward constant improvement. One way this can be done is by having your trustees and your beneficiaries work together to establish their own goals for their lives. This can encourage personal and professional growth in a way that does not require the imposition of your views and values on future generations.
Working With Beneficiaries While You Are Alive
One of the best ways to ensure that incentive trusts work is to involve your beneficiaries while you are still living. Let your children know why you set up the trust as you did. Ask them for input on the things that are most important for them. Custom design each incentive trust to the specific needs of each child or grandchild. Communication is the best way to ensure that the trust works exactly the way you want it to.
Finally, consider allowing your Trustees substantial discretion to work with the beneficiaries. This way, as times and people change, your trust can change as well.
Matthew V. Piwowar is a Grand Rapids estate planning attorney. Mr. Piwowar is a member of the State Bar of Michigan, and the State Bar Probate & Estate Planning Section, the National Network of Estate Planning Attorneys, and the Michigan Forum of Estate Planners.
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