How You Can Use Your Estate Plan to Set Goals for Your Kids
By: Barry E. Haimo, Esq.
August 27, 2020
German writer and statesman Johann Wolfgang von Goethe once said, “There are only two lasting bequests we can hope to give our children. One of these is roots, the other, wings.”
While your estate may be how you channel those very sentiments, you may also be familiar with self-made billionaire Warren Buffet’s philosophy on the matter, “Leave your children enough to feel they can do anything, but not enough that they could do nothing.”
So how do you plan to ensure the inheritance that was meant to provide your children and grandchildren roots does not clip their wings when it comes to professional ambition?
How about setting goals for them with an Incentive Trust?
Incentive Trusts Encourage Positive Growth
Without the proper motivation, it is human nature to follow the path of least resistance in most situations. So expecting an inheritance somewhere down the line could — not surprisingly — stymie an heir’s ambitions to some degree.
If you see signs among your own family members that leave you wondering whether your gifts will help or hinder their professional journeys, the thought of disinheriting (or threatening to, anyway) may have crossed your mind.
The issue with this scenario is that nobody wins. Instead of hanging the threat of never sharing a gift you specifically worked so hard to give them, consider dangling it in front of them instead — a carrot, if you will.
This is the very concept of an Incentive Trust. Clients at Haimo Law are turning to this estate planning strategy as one way to help their children stay motivated to preserve, use, and grow their family’s wealth for generations to come.
How an Incentive Trust Works
Simply put, the grantor of the trust outlines certain conditions on parts or all of its distributions to the beneficiaries. Here are three common examples of how parents sometimes incentivize an inheritance:
- Upon college graduation, each beneficiary will receive a check for the total amount of college tuition receipts plus some percentage above as a bonus for any kind of above-average performance.
- Each year, a distribution is made in an amount matching gross annual earnings reported on the W-2 or 1099 of each beneficiary.
- When a beneficiary marries or has a child the trust may purchase a family home for the couple or new parents.
The way you set up a trust will depend on your personal preferences for each family member, and how you believe they will individually benefit most from your gifts.
What to Consider When Setting an Incentive Trust Up
The most important thing to remember about an incentive trust is that once a condition is set, and you are no longer present to make allowances and adjustments, it is set. There is no flexibility.
So while your intention may be to prevent your children from a sense of entitlement and a lack of true fulfillment through good work in the world, there is a potential for negative consequences as well. How so?
- Say you incentivize a college education. What if your kids find greater life fulfillment outside of the classroom? Or bypass college and become successful without it?
- Or imagine an unforeseen accident befalls your loved one, leaving them unable to earn the money they once did. Does their distribution simply end?
- When you are outlining a housing provision, would you ever expect your heir to stay in a loveless, unhappy, or daresay abusive marriage because they feel like they have to in order to provide the best living situation for their children?
Incentive trusts can be a highly effective estate planning strategy when well-thought-out and created under professional guidance. Remember, every family member is different, and your wishes for each of them can be just as unique.
For questions concerning how an Incentive Trust might fit into your estate plan, reach out to Haimo Law. A seasoned estate planning attorney can provide you with the tools you need to build a legacy you can be proud to leave in the hands of your loved ones.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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