Oct 5, 2015

Incentive trusts: Kindness and concern, or ruling from the grave?

Toddlers get gold stars when they clean  their rooms. Teens are allowed to use the car if they get good grades. So why shouldn't your estate plan reward your heirs for good behavior? If this is what you would like to do, you will need to establish a trust, and think carefully about what provisions to include that can nudge your heirs in the direction you want them to go. Common provisions include requiring a beneficiary to complete college or hold a full-time job before receiving an inheritance. One of my clients, concerned about her grandson's history of drug abuse, made his inheritance contingent on his being drug-free for ten consecutive years.  No sobriety, no money.

All kinds of carrots and sticks can be built into a trust to encourage certain choices and discourage others. But moderation is the key. Too many carrots and sticks can be oppressive for the loved ones you leave behind.

Consider the estate plan of real estate magnate Maurice Laboz. Laboz died recently, leaving behind two daughters, ages 17 and 21. They are set to inherit $10 million each when they attain age 35, but Laboz put many contingencies into his trust that are designed to keep his kids on a certain path - so many, in fact, that some in the media have dubbed him "Daddy Dearest."  Among the provisions:
  • If either daughter is a stay-at-home mom, she will receive 3% of the trust's value each year. But if she has a child out of wedlock? Nothing.
  • Each daughter is to receive three times her annual salary when she begins working, to encourage each of them to establish lucrative careers. If one of them has a passion for a less lucrative, otherwise honorable profession? Too bad.
  • One daughter gets $750,000 when she graduates from an accredited university. But first she'll also have to write an essay, to be reviewed and approved by the trustees, explaining how she intends to use the money.
It would be very interesting to know how these young women have reacted to their deceased father's carrots and sticks. Do they see his plan as a reflection of his love and concern? Will they work towards achieving the standards he espoused? Or do they see him as a control freak, trying to keep them on a short leash and manipulating them from the grave?

There is a fine line between encouraging positive behavior, and attaching so many strings to an inheritance that it embitters your loved ones. Only you can decide how much control you wish to build into your estate plan, and the impact - good or bad - it might have on your loved ones.

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