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Carrots & Sticks

     Whenever someone lacking financial maturity receives an outright inheritance, it is typically good news for sports car (usually red in color) salespeople, travel agents and high-end electronics dealers. [Some have termed this Affluenza.] Is that how you want your hard-earned wealth consumed? And what about the potential long-term damage to your heirs?
     The Incentive Trust is one increasingly popular antidote to this dilemma (short of spending your kid’s inheritance, as the popular bumper sticker proclaims).

Incentive Trust Antidote

     As the name implies, an Incentive Trust is one in which the Trustmaker sets standards of conduct or achievement that must be met before distributions are made to or for the benefit of a beneficiary of the Trust. These standards may include such incentives as completing a certain educational level, becoming self-supporting through gainful employment, volunteering for charitable causes supported by the Trustmaker and even avoiding drug/alcohol abuse.
     However, Incentive Trusts may not include provisions that are considered contrary to public policy. Such provisions include those that may disrupt family relationships by encouraging separation or divorce, foster neglect of parental responsibilities, prevent marriage or discourage the performance of public duties. Otherwise, the scope of permissible incentives is limited primarily by your creativity as the Trustmaker.

Communicate for Continuity

     Effective communication of your Incentive Trust objectives can help prevent future litigation between your Trustee and your heirs, especially over the requirements you establish for distributions. Some families hold financial planning retreats for their intergenerational members to communicate the Trustmaker’s objectives. At these retreats, family members may prepare a written statement of their family values, a family code of conduct and/or a family mission statement. Oftentimes, the Trustmaker’s professional advisors attend the retreat and educate family members about the investment, tax and asset protection benefits of the Incentive Trust. This can help ensure the continuity of your philosophy of wealth accumulation, management and distribution for heirs.

Alternative Antidote

     Perhaps you are opposed to influencing the behavior of your heirs after your death, but don’t want your wealth subject to their squandering, divorces, lawsuits or bankruptcies. If so, you should consider a Discretionary Trust. As the name implies, such a trust makes distributions only in the sole and absolute discretion of the Trustee. The key to a successful Discretionary Trust is selecting and entrusting an appropriate Trustee with broad discretionary authority to protect your wealth for and from your heirs. The non-fiduciary position of Trust Protector can be created to appoint and even remove such a Trustee to ensure fulfillment of your objectives.