Many clients express concern that an inheritance may have a negative impact on their children. This is often the case for clients who created their own wealth, experienced hard work and spent and/or invested their earnings carefully. Will leaving an inheritance to their children inhibit their children’s drive and make their children complacent? Will an inheritance make life “too easy,” depriving their children of the benefits of “making it” on their own? Frequently our conversation turns to incentive trusts, and whether an incentive trust might counterbalance the perceived negative effects of “free money.”
Incentive trusts are trusts that permit payments to a beneficiary contingent on certain goals being met, or certain behavior being avoided. At first blush, incentive trusts seem like a great idea. Shouldn’t they simultaneously motivate a beneficiary while conveying what is important to you and the life lessons you have learned? As with all things in life, it is not this simple and there are pitfalls with incentive trusts. What if the beneficiary is physically or mentally unable to achieve the stated goals? What if a beneficiary wants to stay at home to raise a family, or pursue a career in a meaningful field that pays a low income?
Further, an incentive trust is invariably a subjective analysis. Providing measurable targets to the trustee and the beneficiary is critical to achieving your goals and making the trust workable. Will the person you’ve selected as trustee be willing and capable of evaluating the beneficiary and denying a payment if the beneficiary does not meet the goals?
Incentive trusts are necessarily more expensive to craft because they must be specifically tailored to you and your heirs and to the behavior you want to motivate or discourage. If you are convinced that an incentive trust is right for you, however, there are some things you can do to increase the likelihood of success and minimize bad feelings:
Good communication between you, the trustee and the beneficiary is key to the success of the trust. Consider writing side letters explaining in your own words why you included these terms, what you hope is achieved (or avoided), and your philosophies about life lessons that matter to you.
These side letters are often referred to as ethical wills. They can be the documents by which you transfer your values and reflections on life, and should include mistakes from which you’ve learned as well as successes from which you’ve gained. A few topics to include in your side will could be:
There are many helpful resources online and in book stores to assist you with writing an ethical will. It is important to remember, however, that a side letter or ethical will is not legally binding, and must be coordinated carefully with your estate plan to ensure it does not hamper or contradict provisions in your estate plan. Further, the language you use is vitally important to whether your incentive trust will be viewed as insensitive and controlling, or appropriately encouraging.
Finally, there is no substitute for expressing your views in person with your loved ones. Consider meeting in person to discuss your plans with your heirs. Both you and your heirs may be pleasantly surprised by what you both learn from each other. And if the first meeting is awkward and uncomfortable, don’t lose heart. Keep at it. Nothing important is gained without hard work.
