You may be afraid that they’ll become spoiled brats, who do nothing but spend money they haven’t earned or invest foolishly.
FEDWeek’s recent story, “Using a Trust as an Incentive for Your Heirs” explains that trust distributions can be limited to modest amounts or left to the discretion of the trustee, who’ll manage the trust assets.
The article suggests that if you do leave money in trust, you should avoid the common practice of providing for distributions at the ages 25 and 30.
That’s because at those ages, most people are better off finishing their education and establishing their careers. Giving them a bagful of money at that age, might decrease their drive to pursue a meaningful career.
One way to do this is what’s called an “incentive” trust. This type of trust offers rewards to trust beneficiaries who accomplish specific goals.
With an incentive trust, the beneficiaries might get a particular amount of money for getting higher education degrees, attaining certain levels of earned income or volunteering at a church or in the community. For instance, your trust could be drafted by your estate planning attorney to state that the trustee will distribute to each of your grandchildren a certain percentage (such as 25%) of earnings each year, up to a certain amount. This could be tied to a requirement that you make.
Another way to go about this trust, is to leave the distributions to the discretion of the trustee. The trust might detail the types of activities that will be rewarded, then permit the trustee to make appropriate distributions.
When you’re going to depend so much on the judgment of the trustee, for this type of arrangement to work, it’s critical to choose a highly-qualified trustee.
The trustee could be a relative, friend, or professional advisor. He or she must be able to empathize with your beneficiaries but still make prudent decisions about distributions. In addition, add a plan for trustee succession, in case your first choice becomes unable or cannot serve.
Reference: FEDWeek (January 17, 2019) “Using a Trust as an Incentive for Your Heirs”