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Incentive Trusts: Proceed with Caution


You love your children, but they are terrible at managing money.  When they were little, you dreamed of the day when they would be financially independent, but now that you are thinking about estate planning, you are starting to realize that the money you planned to leave to your children will be gone in a few short years if they continue in their current financial habits.  Yes, the financial lives of your adult children are ultimately out of your control, but there are two things you can do to help or to state your wishes.  First, you should talk frankly with your children about their current and future financial state and yours; ideally, you should start having these conversations before your children are old enough to make major decisions about money, but if they are already adults, it is not too late to start.  Second, you should talk to an estate planning lawyer about your options, including incentive trusts.

What Is an Incentive Trust?

A trust is a fund for which the person with the authority to disburse money (the trustee) is not the same as the person to whom the money is paid (the beneficiary).  Many wealthy people set up living trusts with themselves as trustees.  Trusts are important in estate planning because assets transferred to the trust while you are alive usually do not go through probate.  In an incentive trust, you set requirements that the beneficiaries must satisfy before the trustee will disburse money to them.  For example, you might specify that the beneficiary must be employed or, failing that, be a full-time student.  In fact, the incentive provisions can be anything, as long as they are not illegal.

Why Incentive Trusts Backfire

To beneficiaries, incentive trusts can feel like you are punishing them and controlling them from beyond the grave.  They can be a constant reminder of the bitterness in your relationship, which can compound their grief.  Besides, they usually do not change the situation that the parent is trying to control with an incentive trust.  Financial incentives will not cure your child’s addiction, make them heterosexual, or convince them to break up with their partner, for example.

What to Do Instead

If you are wealthy enough to bequeath to your children more money than they could ever need, then you should also include additional beneficiaries so that your wealth can do the most good after you are gone.  You can follow Warren Buffet’s rule about the perfect amount for inheritance; in other words, leave your children enough money to make them feel that their goals are attainable, but not enough that they have the option of becoming do-nothing professional heirs.  You should leave the rest to organizations that you feel are effectively working to change the world for the better.

Let Us Help You Today

Trusts can make life easier for you and for their beneficiaries, but only if you use them appropriately and for wholesome purposes.  An experienced Washington DC estate planning lawyer can help you see the big picture about trusts.  Contact Tobin O’Connor Concino P.C. or call 202-362-5900.


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