Trust Incentives and Restrictions: Making Sense for Heirs

Trust Incentives and Restrictions: What Makes Sense for Your Heirs?

If you think about it, trust distributions are like taxes. But whereas taxes seek to guide your economic choices toward government goals by instituting greater or lesser penalties, trust distributions grant money to a beneficiary who satisfies certain criteria.

Common goals that grantors have in mind when drafting a trust include educational attainments, work incentive, a healthy lifestyle, and even moral/religious considerations. Basically, anything legal or not otherwise prohibited can be put into trust distribution instructions to help ensure your legacy has the desired impact.

Education

High net worth (HNW) families frequently emphasize educational achievements for their children and grandchildren. Historically, education has correlated with income level and has shown a person’s ability to reach a difficult goal. When developing a trust that fosters educational development, distributions might be tied to GPA, the completion of a degree, or even the selection of a particular school or course of study. In addition, there can be multiple conditions that govern how much and how frequently a beneficiary receives distributions for educational purposes so that it’s not just “once and done.” An amount might be given for completing a degree on schedule, for example. Or it can be paid out a year at a time. Again, trusts are very flexible.

Incentive

Inherited wealth can destroy incentive and lead to an entitled, self-indulgent lifestyle. To prevent wealth’s harmful effects on your heirs, you might introduce provisions that require a certain level of promotion before distributing funds. You can also add restrictions that withhold distributions if, though working, your beneficiary is not also saving money, pursuing home ownership, or getting married. As it’s all too easy to live off someone else’s wealth, it’s important to tie distributions to goals the beneficiary is setting and accomplishing on an ongoing basis.

Car and homeownership

Many young people just starting out find it difficult to afford a car or a home. And while you may not want to purchase either for them, perhaps trust distributions can lower the bar a little so that your beneficiaries can get to and from that job or live nearby. Or if they are at the age where they are starting a family, you may want to provide a certain quality of life for the next generation. Distributions might be limited in amount and tied to the price of an economy car or the median home values for your area. You might require that a beneficiary have a clean driving record or even report driving statistics to the trustee using one of those tracking devices insurers offer.

Lifestyle

The older generation often feels that the younger generation is undisciplined, whether or not they were any better at that age. But some things can really mess up a young person’s life: drug addictions, arrests, unplanned pregnancies, bad credit, etc. To create an incentive for your beneficiaries to “keep their noses clean,” you might withhold distributions based on certain bad behaviors. It can seem cruel to punish a beneficiary for a mistake, but restrictions can be worded in such a way as to hold back money that would only feed an addiction, prevent a beneficiary from cleaning up a bad credit report, etc. You can’t foresee all the curve balls life might throw, but with intelligent planning and awareness of how wealth can actually destroy someone’s life, you and your attorney can include general provisions that your trustees can carry out to the benefit of your heirs.

Moral and religious considerations

Some families place a very high value on their children’s spiritual development. While it’s debatable whether money can steer someone toward a sincere religious conviction, some trusts include provisions that heirs belong to a church/synagogue, “live a moral lifestyle,” volunteer, give to charity, etc. If you have such goals for your heirs, it may comfort you to have a provision that only gives money to someone living in a way that you approve. In the event of a refusal to carry out your wishes, you can direct that the money go to an organization instead so that your legacy isn’t wasted. Just be ready for backlash if your heirs and you don’t see eye to eye on matters as religion and morality, as such provisions can create long-term resentment and even put your trustee in the difficult position of having to judge whether a beneficiary has met your criteria.

Putting it all together

You know your family. A competent and empathetic estate attorney can help you draft provisions for your trust that provide the unique protections you feel are warranted. There are also examples of trust provisions online that might help you develop your ideas before you involve legal professionals. When you are ready, we would love to help connect you with an estate attorney in your area to get started.

One your trust is in place, you should review and update it regularly as your situation changes. In addition, it could make sense to hire a professional third-party corporate trustee to administer the trust’s terms dispassionately. You can read about how to select a corporate trustee here. We feel that removing trust administration from the family helps reduce tensions that can result when a family member enforces trust restrictions.

Finally, managing a trust takes a lot of time and attention. You may wish to have a professional asset manager build your trust portfolio so that it balances the need for income with the need for growth. Using a professional manager may reduce some of your liability if a disgruntled beneficiary were ever to challenge your investment decisions.

Alpha Fiduciary has developed a professional asset management and personalized trust service offering to help protect your family’s legacy. We have partnered with professional third-party corporate trustees to administer your trust competently while we manage the investments toward your goals. We maintain a cooperative and fully responsive relationship with you and your beneficiaries, and this approach helps to ensure that trust administration does not become a “thorn in your side.” Because we are independent of the trust companies, we can select the corporate trustee that best serves your interests and avoid inconsistent or poor service. In addition, if you need help drafting your trust documents, we can make referrals to trusted estate attorneys licensed in several states.

Contact us today to learn more!

About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.

Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).

Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.

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About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.