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When and How to Incentivize an Inheritance

Posted on: December 15th, 2016
inheritance planThe manner in which one bequeaths family wealth might not preserve assets for their intended use. When the next generation receives a transfer of wealth, their financial decisions may not be favorable. If a beneficiary received the assets as an outright distribution, rather than in trust, there is little that can be done to prevent possible inadvisable use of the funds. Our trust lawyers take a closer look at a few key events and life stages that might prompt a parent or grandparent to restructure assets for future heirs, as well as a few estate planning methods for building inheritance incentives.

It is likely time to consider revising trusts or creating trusts to protect assets if a future heir exhibits:
  1. Spendthrift behavior. An individual who is irresponsible financially might be exhibiting a preview of how they will waste their inheritance. Credit card debt, bankruptcy, missed loan payments, or extravagant purchases are warning signs.
  2. Addiction or substance abuse. A future heir battling unhealthy habits could result in an inheritance spent fueling addiction. Leaving assets in trust could help to prevent a wasted inheritance if past addictive behavior of recovered individuals manifests again later in life.
  3. Lack of motivation. Whether an individual will not maintain employment because they expect a future inheritance, or they lose jobs due to poor performance issues, in both cases the potential heir may continue this pattern once they receive their inheritance. Disinterest is also a pressing concern when managing a family business when a future heir exhibits no desire to take over the business.
To help protect an inheritance from being squandered, some methods may include:
  1. Passing wealth now. This may seem counter-intuitive, but it depends on family goals. In some situations, one might decide it is in the best interest of the family if the family wealth passes on to a charitable organization. This ensures the assets will be used in alignment with family values. To keep a life savings in the family and to take advantage of gift tax exemptions, it might be favorable to implement gifting during one’s lifetime. One may make tuition payments directly to the university, or stagger gifts directly to the heir based on achievement of business or education goals. If considering whether to implement a lifetime gifting program, one might wish to consult with a tax attorney to determine which assets could be gifted most advantageously during one’s lifetime. For long-term management and post-mortem administration of assets along these same practices, an incentive trust would be an ideal tool.
  2. Incentive trusts. Incentive trusts are established with custom provisions that make distributions to trust beneficiaries only if they meet the standards in the trust document. Some incentive trusts prevent distributions if the beneficiary fails a drug test, is not enrolled in higher education, or fails to keep gainful employment. Incentive trusts can implement income-matches, tiered inheritance levels, and other means to help build a beneficiary’s motivations. For example, for income-matching, if a beneficiary is required to maintain employment in order to receive a distribution, the trust terms could provide that if the beneficiary secures a position with a salary of $7,000 per month, then the trust will distribute equal amounts monthly. Tiered inheritance provisions may change distribution amounts so that a beneficiary acts in line with the trust grantor’s values. For example, the grantor may provide that a beneficiary who receives a medical degree receives a $20,000 inheritance, an engineering degree $15,000, a business degree $10,000, or in another fashion that encourages the beneficiary to act according to the grantor’s wishes. Learn about mistakes with incentive trusts.
  3. Family business succession plan. When an heir of a family business is not interested in carrying on the legacy, a business succession plan should be created or modified. Succession plans can include directions for utilizing internal talent or selecting external candidates to manage the company, disposition procedures, and other matters.
If a trust is already in place and the need for modification arises, consult with a trust attorney to identify an optimal solution. Discuss trust termination, decanting, use of a trust protector, and what opportunities lie in the trust document’s existing provisions.
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