Providing for Your Children — With Strings Attached

As a parent, you may have concerns about your children’s ability to handle the assets they will someday inherit from you. Perhaps you feel that your children lack the financial maturity to manage and protect a sizable inheritance. Or, maybe you’re worried that sudden wealth could have a negative impact on them in terms of retaining values and a good work ethic.

One popular solution to this concern is the use of an incentive trust. This type of trust sets standards of conduct or achievement that must be fulfilled before distributions are made to beneficiaries. A trust structured this way can also help to control estate taxes and provide professional asset management.

Reinforce Values

You can use incentive trusts to reward a wide range of behaviors (or discourage certain behavior) on your beneficiary’s part. When you create such a trust, you simply set up guidelines that you believe your children (or other beneficiaries) should follow. Since you create those conditions within a legally binding trust agreement, you can be certain that distributions will be made only if your terms are met.

Establish Conditions

You can set a variety of conditions on your children’s receipt of distributions. Here are some common types of provisions included in incentive trusts.

• Education - You may require your children to finish a certain level of education or maintain a certain grade point average to qualify to receive trust funds.
• Family Business/Employment - You could reward a beneficiary who takes over a family business. Or, you could encourage gainful employment by matching a percentage of the income that your children earn.
• Charitable Causes - To promote philanthropy, you might set up a trust that will match your child’s charitable donations or provide incentives for the performance of volunteer work.
• Healthy Lifestyle - You could restrict the distribution of trust funds to your children if they engage in destructive or illegal activities, such as the abuse of drugs or alcohol.

When placing conditions on an inheritance, it is important to build in flexibility so that the trust provisions do not prove counterproductive. Be sure to explain the incentives clearly in your trust agreement. Think carefully about what you’re trying to accomplish and try to make the incentives simple and achievable.

Proceed with Caution

When used in a sensitive, thoughtful manner, an incentive trust can encourage positive behavior by trust beneficiaries. If the conditions are overly restrictive, however, the result may be resentment or even considerable unhappiness on the part of your children. For example, a child may feel that you are trying to rule “from the grave.”

To prevent unwanted results, keep the lines of communication open. By discussing the incentives and/or restrictions with your children in advance, you can help clarify goals and avoid future problems. What’s more, an open dialogue can help your children better plan their financial futures.

Keep in mind that an incentive trust is not a cure-all for your estate plan — or for family problems. In fact, it may be unnecessary in many cases where a child doesn’t need any incentive to act responsibly. For some families, however, it is a planning option that may produce favorable results.

If you want to know more about First Market Bank's Trust Department or trusts in general please call us at 1-804-327-5749.