It's not easy building wealth, and sometimes it's not easy giving it up--even to family. Incentive trusts, born of the stock market's glory days in the 1990s, are increasingly resurfacing as a way to hand over money or property with strings attached. The idea, in a nutshell, is to create financial incentives--or disincentives--for heirs to act in certain ways after you die.
It's hardly a new concept to put restrictions on a large bequest of money or property. It's almost estate-planning gospel, for instance, that trust-funders should limit the amount recipients receive until they are old enough to handle it wisely--whether that age is 18, 25 or 40. Incentive trusts take things a step further. They force recipients to do specific things to stay on the gravy train.
You might, for example, want future generations to graduate from college or earn advanced degrees. Or you might force heirs to have and keep full-time jobs if they want trust money. You might require them to pass drug tests before each payment, or perhaps spend time overseas as religious missionaries.
Entrepreneurs who have devoted their lives to building businesses might like the idea--if they're not around to do it themselves--of having a trust advisory council make sure the next generation goes to school, works hard and learns the business before they inherit certain types of property.
One problem is that incentive trusts are complicated, which means they tend to be expensive to establish and maintain. You'll need professional help to create one, and you'll probably want blunt discussions with a financial professional about ways they've seen incentive trusts play out for other families.
In particular, you'll have to carefully word trust language to create distribution standards that fit your philosophy for not-yet-born beneficiaries or beneficiaries who are still children. Trust lawyers are full of stories about enterprising trust-fund recipients who found ways around limitations written into their inheritances.
The good news is that there are often less expensive and less complex options than incentive trusts to pass along morals and values. These include spendthrift trusts, private foundations, family limited partnerships and so-called ethical wills.
Scott Bernard Nelson is deputy business editor at The Oregonian and a freelance writer in Portland, Oregon.