Using “Incentive Trusts” to Control From Beyond the Grave

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“Control from beyond the grave.” It sounds likes something out of an episode of the Twilight Zone or Tales from the Crypt. While the phrase may sound spooky, it is something many people try to achieve using incentive trusts. Incentive trusts are pretty much what they sound like: trusts that give beneficiaries an incentive to act (or not act) in a certain way.

Usually, the desire for so-called “dead hand control” arises more from a wish to ensure the well-being of a beneficiary than from any mean-spirited or greedy intent on the part of the donor. For example, incentive trusts are often used to motivate beneficiaries to achieve goals that the grantor thinks would be good for them. Distributions may be conditioned upon making Dean’s List, graduating from college, entering a certain profession, starting a business or getting married. Other times, the distribution or bequest might be used as a stick, rather than a carrot. A beneficiary with a history of substance abuse might risk losing distributions unless he or she remains sober.

Whether used as an incentive to achievement, or to protect beneficiaries from their own worst impulses, wills and trusts that attempt to impose dead hand control may not be as effective as the donor had hoped. That is not to say you can’t use your estate plan to shape the behavior of your loved ones while protecting their assets. It just means that you should discuss the best way to do so with your estate planning attorney.

What Can Go Wrong With Incentive Trusts?

Incentive trusts try to anticipate the future—something we humans are notoriously bad at. We may imagine scenarios that never come to pass, while ignoring remote possibilities that do. The world may look very different between the time that you draft a trust and the time you die, or between your death and the time when a distribution might be made. Laws are subject to change, as well. And perhaps the most unpredictable factor of all: your beneficiaries.

The bottom line is that drafting a trust that covers all the contingencies you want to plan for is nearly impossible. Even if you were able to do so, you would probably sacrifice flexibility that you or your trustee may need.

Making an iron-clad document may not be the solution to keeping your loved ones and their assets safe. Certainly, careful, precise drafting is important. But rather than trying to make the trust instrument do all the heavy lifting, you might take an approach that serves your interests but preserves flexibility: choose a trustworthy trustee, let them know what you are trying to accomplish, and give them the power to achieve that.

Be honest with yourself in assessing your goals. Many people who try to exercise dead hand control are hoping to shape the character of their beneficiaries by controlling their access to trust funds. You may get your beneficiary to do what you want, but understand that they might be doing it because of the external reward, not because of the intrinsic motivation you would probably prefer that they have.

How Your Estate Planning Attorney Can Help

Your estate planning attorney can guide you in identifying interests, not positions. What’s the difference? An interest is, “I want my grandchildren to have meaningful skills and be self-supporting.” A position is, “I want my grandchildren to graduate from a four-year college.” There are many ways to achieve the former; the latter is a yes-or-no proposition that may be just one way of achieving an interest.

Spend some time talking with your attorney about your goals and concerns for your beneficiaries. These can be written into your trust instrument, preferably as guidance for your trustees, rather than hard-and-fast rules.

Put another way, a young adult can become productive and self-supporting without going to college; a young adult may graduate from college and still not have the ability to be self-supporting. If you limit distributions from your trust to college graduates, your granddaughter who is a skilled, gainfully-employed welder will miss out, while your nephew with a degree who sleeps until noon and refuses to look for work cashes in.

Spend some time talking with your attorney about your goals and concerns for your beneficiaries. These can be written into your trust instrument, preferably as guidance for your trustees, rather than hard-and-fast rules. If you choose a trustee in whom you have confidence, you can grant them discretion which will achieve your aims while avoiding unintended circumstances.

You might, for instance, give your trustee discretion to withhold distributions if he or she is concerned that a distribution might not be in the beneficiary’s best interest. Such circumstances might include if the beneficiary is actively struggling with substance abuse or a gambling problem, or going through a divorce. Similarly, you can empower the trustee to make extra distributions to mark notable milestones, such as graduating from college or getting married. The key is that the trustee has the discretion to evaluate the situation and make a distribution if it seems wise, rather than making a distribution because the rules of the trust say so.

Of course, for this to work, you need to choose a trustee who understands your value and whom you can trust. Your estate planning attorney can also advise you on choosing a trustee. We invite you to contact our law office to schedule a consultation.

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