‘Dead-hand control’ in estate planning impacts beneficiaries alive and well

Incentive trusts are estate planning instruments designed to encourage specific behaviors or achievements among beneficiaries. Unlike traditional trusts that distribute assets based solely on age or time, incentive trusts tie distributions to predetermined conditions or milestones. These conditions can range from educational attainment and career success to personal development and philanthropic endeavors.

Common types of incentive provisions and examples include:

• Education-based incentives (graduating from college).
• Career-oriented incentives (maintaining steady employment).
• Financial responsibility incentives (matching earned income).
• Lifestyle incentives (maintaining sobriety).
• Philanthropic incentives (engaging in charitable activities).

Studies have found that education-based incentives were the most popular, with more than two-thirds of incentive trusts including provisions related to academic achievement.

While the idea of posthumous control over assets has existed for centuries, its application in modern estate planning has sparked debate among legal scholars and practitioners.

The use of incentive trusts in the United States became fashionable, according to experts, in the early 1990s. Now as popular as candy corn and peanut butter cups, they are a way for the departed to continue to control the lives of the living. Simply put, beneficiaries only get an inheritance by following the orders of their deceased relatives.

“Bribe is a dead-on synonym for this modern version of the Golden Rule: He who has the gold makes the rules,” says a 1995 New York Times report recounting that decade's rise of the incentive trust, especially among the wealthy, and the “dead-hand control” it affords the departed.

“Some benefactors use them as a form of cloning, rewarding heirs who go to the same schools, study the same subjects or enter the same profession as they did - and cutting out those who won't march in step,” the report says. “Others use them to impose values. They try to make the dissolute thrifty by matching their savings, teach the selfish generosity by underwriting philanthropy and transform playboys into homebodies by tying their inheritance to marriage.”

The idea that too much money can be a corrupting influence is hardly new. Consider the 1891 essay, “The Advantages of Poverty,” by steel industry magnate Andrew Carnegie. The Gilded Age tycoon, who left his family a fraction of his enormous wealth and gave the rest to charity, writes that “the parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would.”

During life, individuals make choices about what and how much they want to leave behind for the benefit of family members, loved ones, charities, good causes and other purposes. One purpose that comes to mind this Halloween season is to enable those in the great beyond to maintain a grip on their assets from the grave.

While the creator of a revocable living trust (known as the grantor or settlor) has considerable latitude in structuring incentive trusts, there are legal limitations to dead-hand control. Courts may invalidate trust provisions that:

• Violate public policy (e.g., encouraging illegal activities).
• Unreasonably restrain marriage or divorce.
• Interfere with religious freedom.
• Promote racial discrimination.
• Are deemed too vague or impossible to enforce.

The landmark case of Shapira v. Union National Bank (1974) established precedent for upholding certain marriage-related conditions in trusts. However, subsequent rulings have emphasized the need for reasonableness and alignment with public policy.

Many factors motivate people to use documents like wills and trusts to control how and when the fruits grown during life can be plucked by duly appointed heirs. People often feel they know what's best for us, even after they are gone. Legal papers and trustees require behavior that the dead find appropriate, if you want some of “their” money, and those lacking a pulse can flex their financial muscles from the crypt. They can't take their assets with them, but they can attach some sturdy strings to keep you from getting them, unless you behave according to their plans.

In a more formal way, the dead-hand control of an incentive trust can be defined as “conditioning a bequest ... to a beneficiary such that they will only receive the gift if they abide by the conditions of the gift,” says author William C. Spaulding. “Sometimes it is to protect the beneficiaries from their own bad behavior or financial mismanagement. Often it is to promote a family lifestyle or to incentivize the beneficiaries to work, or to prevent them from becoming profligate or lazy.”

Many times, the incentives seem reasonable enough. Perhaps the benefactor wants someone's inheritance contingent on earning a college degree, entering a particular profession, staying sober or settling down and getting married. They are providing a posthumous prod for heirs to toe the line or risk losing the aid of the expired.

In the spirit of Halloween, it's worth considering at least one creepy example of a final attempt to forge forthright character into a breathing beneficiary from the confines of a coffin.

Leona Helmsley, crowned in the media as the “Queen of Mean,” is among the deceased poster people who've dangled inheritances like venomous spiders to impose what some may consider wicked whims upon the living. Besides her fame as a New York-based hotel magnate and convicted tax cheat, she's perhaps best known for the $12 million trust fund she left for the care of her aptly named dog, Trouble.

When the details of Helmsley's last will and testament were made public in 2007, “control freak” was added to the derisive descriptive labels affixed to the controversial billionaire. Helmsley included all sorts of directives in her will. Among them was a demand that the family tomb be “acid-washed or steam-cleaned” annually. Although her reputation may have been tarnished, it seems she wanted to make sure her final home would leave a squeaky-clean impression.

“Helmsley, through her will, is still calling the shots,” declares a New York Times headline at the time, noting a “sharp increase” in the use of incentive trusts “doing the bidding of the dead.” Just ask her four grandchildren. Two of them received a $5 million bequest, which may seem like a lot, but when it's less than half of what the dog got, it makes granny look greedy. But there was a catch that helped her earn her “control freak” bona fides. A provision in Queen Leona's will requires that the two grandchildren visit the grave of their late father at least once a year or they “shall not be entitled to any distributions.” Her will also mandates they sign a guestbook as proof of their visits, basically enabling her dead hand to require in-person signatures to be certified in perpetuity by her alive-and-well trustees.

It could have been worse. She didn't leave dime for the other two grandchildren “for reasons which are known to them.” Those reasons – because they failed to name any of their children after their grandfather – later became known to everyone else. Helmsley could have made an inheritance for her estranged grandchildren contingent on them changing the names of their offspring, but why take things to the extreme?

While incentive trusts are designed to enforce the grantor's wishes, beneficiaries may seek to challenge or modify trust provisions under certain circumstances. Common grounds for trust contests include:

• Lack of testamentary capacity.
• Undue influence on the grantor.
• Fraud or forgery.
• Violation of public policy.
• Changed circumstances rendering trust purposes obsolete.

A lack of testamentary capacity occurs when the grantor was not of sound mind when creating the trust. This could be due to mental illness, dementia or other cognitive impairments that affected their ability to understand the implications of their decisions.

Another frequent claim is undue influence, where beneficiaries argue that the grantor was coerced or manipulated by another party into including certain provisions in the trust. This often involves allegations of a caregiver, family member, or advisor exerting pressure on a vulnerable grantor.

Fraud or forgery claims are also potential grounds for contest, though these are typically more challenging to prove. These cases might involve allegations of falsified documents or misrepresentation of facts to the grantor. Violation of public policy is another avenue for challenge, particularly when trust provisions conflict with established legal principles or societal norms. For example, conditions that discriminate based on race, religion, or gender could be deemed unenforceable.

Meanwhile, beneficiaries may argue that changed circumstances have rendered the trust's purposes obsolete. This could apply in situations where societal shifts, technological advancements or family dynamics have evolved significantly since the trust's creation, making its original intentions impractical or irrelevant.

The process of challenging an incentive trust can be lengthy and complex, often requiring extensive legal proceedings. Beneficiaries must typically file a petition with the probate court, presenting evidence to support their claims. The burden of proof generally lies with the party contesting the trust. If successful, the court may choose to modify specific provisions, invalidate certain conditions or in extreme cases, overturn the entire trust.

However, it's important to note that courts generally strive to uphold the grantor's intentions when possible, and successful challenges to well-drafted incentive trusts are relatively rare. Many trusts include "no-contest" clauses, which can disinherit beneficiaries who unsuccessfully challenge the trust, adding another layer of complexity to the decision to contest. Given these complexities, beneficiaries considering a challenge should carefully weigh the potential benefits against the risks and seek experienced legal counsel before proceeding.

Incentive trusts and dead-hand control represent powerful tools in modern estate planning, allowing individuals to exert influence over their beneficiaries' lives long after death. While these instruments offer a means to encourage desired behaviors and preserve family values, they also raise complex legal, ethical and practical challenges. The rise of incentive trusts since the 1990s reflects a growing desire among grantors to shape their legacy and protect their assets from potential misuse.

As exemplified by high-profile cases like that of Leona Helmsley, the line between reasonable guidance and excessive control can be thin. The legal limitations on incentive trusts, including restrictions on provisions that violate public policy or unreasonably constrain beneficiaries, serve as important checks on posthumous authority. Meanwhile, the potential for beneficiaries to challenge these trusts underscores the need for careful, well-considered trust design.