Oct 19, 2009

The Carrot and the Stick

"Ron" and "Margaret," age 73 and 71, were sitting in my office, worried and confused. They confessed they had put off estate planning for years because they just didn't know how to handle their family situation. They had two sons. One of them was fiscally responsible, but the other, who I'll call "Mike," was a lifelong gambler. They had waited to set up a plan in hopes Mike would "grow out of it" but now that Mike was in his mid-40s, change didn't seem likely. If their $600k estate was distributed equally between their sons, they had no doubt Mike would squander his inheritance at the track in no time flat. They wanted to treat their sons equally, but they thought that was foolish and unrealistic. What could they do?

I advised them that by setting up a revocable trust - also known as a living trust - they would be able to stipulate the conditions under which Mike receives his inheritance. With further discussion, they decided to include provisions whereby Mike received an amount each year equal to the amount he earned in wages. If he earned over a certain amount, he would receive a $20,000 bonus. If he wasn't working, he'd get nothing. Essentially, we were setting up a "carrot and stick" approach to protect Mike's inheritance, as well as encourage healthful behavior.

I also recommended against designating Mike's brother as the trustee, since managing his less responsible brother's monies would be a sure-fire recipe for sibling conflict. I instead recommended they use a third-party trustee.

Establishing a living trust allows you to impose any conditions you want on your heirs' inheritance - provided of course that such conditions do not involve anything illegal. For example, many of my clients require their grandchildren to complete college before receiving their inheritance. Some even provide a financial bonus if the grandchild completes his undergraduate education in four years or less, in hopes that this provides an incentive for the child to hit the books.

While you don't want to "control beyond the grave" per se, there's nothing wrong with providing a financial carrot -- and a stick -- that may nudge your loved one in the direction of healthful and responsible behavior!

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