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Think carefully when including incentives to qualify for an inheritance

by Tom Alberts | Senior contributor
June 11, 2019

While incentive trusts can motivate your loved ones to accomplish worthwhile goals, or punish them if they don't, they can lead to unintended consequences and estate planning failures, experts say.

In the United States, incentive provisions in trusts have grown in popularity as a way to reward your loved ones - as long as they do what you say when you can no longer speak. An incentive trust makes an inheritance contingent on your beneficiaries doing what you want done - or not done.

Many parents and grandparents alike want to “pass certain 'values' from beyond the grave,” says Wealthmanagment.com. They want you to earn your inheritance and guarantee their hard-earned assets are used as they see fit.

Over the past few decades, this form of behavior modification using money or property - some equate it to bribery - has become an increasingly popular item on the estate planning menu. The Wall Street Journal in 1999 declared incentive trusts had advanced to “the new trend for the millennium.” A Dallas attorney recounted a growing trend of his clients who wanted estate plans discouraging behavior by denying an inheritance, for instance, if children failed to sign prenuptial agreements or failed periodic drug tests.

a woman smiling imagining getting her degree

Some clients wanted to motivate loved ones to earn a degree, achieve certain career goals or prove they are leading productive lives deserving of an inheritance. Others worried an inheritance could be wasted or cause harm to the recipient - the 18-year-old car-buying spendthrifts or the slackers who'd prefer to live off someone else's hard-earned assets.

One factor driving the popularity of incentive trusts is that parents and grandparents may be hesitant to disinherit a loved one outright for behavior they find unacceptable. Instead, they opt for offering rewards contingent on “good” behavior.

A recent Cornell study divides traditional conditions found in incentive trusts into four categories. They encourage educational goals; reward moral, religious or lifestyle objectives; provide motivation to achieve career and income goals; and discourage destructive or immoral behaviors. In other words, parents and grandparents are inclined to want you to get a degree, attend church, get a decent job and avoid addiction and the irresponsible spending that goes with it.

These days, what's fit for an incentive trust is “limited in scope only by the imagination of the estate planner and the client,” the magazine says. The only limits are that the requirements don't violate public policy - like making people commit discriminatory or unconstitutional acts - or call for illegal actions. Provisions that tamper with religious preferences, sexuality, and freedom to marry and have children are not valid.

What are concerns about incentive trusts?

Incentive trusts can't anticipate future events like a living person can.

“Trusts must be drafted to stand the test of time and remain functional in the face of changing laws and social attitudes, sometimes extending far into the future,” advises trusts and estates attorney David H. Lenok. “While flexibility and specificity aren't necessarily mutually exclusive, the two concepts are certainly at odds with one another.”

Inflexibility can lead to failure, he warns, when parents and grandparents set milestones that aren't achievable at no fault to the potential beneficiary. For example, should a future granddaughter with special needs be punished because she can't obtain the college degree you require?

“The obvious answer here is to include some exceptions to the requirements, making allowances for unexpected events or non-traditional choices, but at a certain point, such granularity simply creates more confusion instead of less,” says Lenok.

Incentive provisions in trusts do work in many cases, says Maryland-based attorney Steve Shane, “but situations can change rapidly and can be totally unpredictable by the time the trust comes 'on line.'” A better approach might be to appoint a trustee with sound judgment and flexibility to manage your trust using their discretion - not the discretion of an unyielding dead hand, he says.

Lenok urges caution if you want to pass along a value system, like mandating marriage by a certain age or choosing someone else's career or politics. “Why create a situation where the beneficiary is forced to choose between love and money (and by extension post-mortem parental approval),” he reasons.

For others, an estate plan based on a trust-but-verify scheme cheapens the family bond.

“Even if the parents try to make it sound positive by using 'incentives,' the whole notion implies distrust,” a sociology professor told the Journal. “Even after the parents are dead, a child will feel like, 'I'm still being put to a test.'”

a guy holding up a picture of a fake smile to his face

Parents and grandparents set goals and want loved ones to earn their inheritance based on future actions, deeds and behavior. They want to reward academic achievements and career and income objectives. They want to influence lifestyle choices and discourage bad behavior.

But an incentive trust with a lack of flexibility and unrealistic demands can lead to unwanted legal challenges, unintended consequences and family dysfunction, experts say.

“While the actions being encouraged are laudatory, the motive and intent behind the actions are likely to be a selfish play for the money,” a pastor told the paper. “You'll have children doing the right things for the wrong reasons.”

A recent Barron's report on the continued popularity of incentive trusts offers some advice: “Think long and hard before you add explicit behavioral conditions to any trust. Rather than tie up your trust - and trustee - in knots, draft your trust document in the broadest possible language. Choose your trustee wisely and empower that individual with maximum flexibility, allowing him or her to make decisions in the beneficiary's best interests.”

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

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