Everyone hopes their heirs will be responsible with their inheritance, but too often the heirs experience Sudden Money Syndrome and treat their inheritance like lottery winnings. A simple solution to this is making money available when a beneficiary makes responsible decisions instead of dispensing funds from a trust at certain ages. This is commonly called an incentive trust.
First, think about what values you want to promote to your heirs. Is it education, philanthropy, or involvement in the family business? Then, consider how will to measure the success of those values. Finally, think about what restrictions or stipulations will encourage your values.
If education is important to you your trust can pay for the heirs’ tuition. Additional funds can be dispensed to the student if they have a high GPA as a positive motivating tool. You could also decide to distribute funds when they achieve an undergraduate or master’s degree. You may want to limit the amount of time a student has to complete a degree.
Your trust can also include an incentive to join the family business by having provisions that reward beneficiaries that take up important responsibilities. If you are worried that your children lack a work ethic because they grew up with money, you could penalize beneficiaries who don’t work by decreasing distributions. In addition, your trust could match the earnings of the heir to promote gainful employment. Consider what will happen if your beneficiaries work as a teacher, social worker, actor, musician, or other socially beneficial position. In such a case you could tie the distributions to an amount adjusted for inflation, or the income of a lawyer or doctor. Also consider the possibility that your heirs will become stay-at-home parents – you may want to include a safety net or base distributions on the income of the spouse.
Your incentive trust could also discourage negative behaviors like alcoholism, drug abuse and gambling. You may want to stop or decrease fund payments if they engage in these behaviors, but fund treatment centers, like rehab or counseling.
If you want to endorse philanthropy, the trust could pay a beneficiary for the hours they volunteer or provide matching charitable donations to reward them for teaching, doing community service or donating to charity.
You may want to encourage entrepreneurship. You trust could loan or provide funds to start a business. You may want to require the beneficiary to submit a business plan to the trustee for approval. This would encourage financial literacy.
Consider what happens in the beneficiary is injured, develops a learning disability, or is otherwise unable to complete the requirements for distribution. You may want to provide a safety net to provide for their healthcare, education and living expenses.
It is important to discuss these incentives with your heirs so they understand why they are in place. The distributions shouldn’t be automatic, but at the discretion of the beneficiary – they may prefer to keep funds in the trust for tax reasons.