Do you feel strongly that your granddaughter should attend the same college you did? Or that your wayward son should get married and have children, but only when he is at least 25 years old? Or that all of your children together should one day take over your family business?

And would you like to be able to compel these family members to heed your wishes even after you have died?

An estate-planning tool called an ­incentive trust could help you prod your heirs in a desired direction when you are no longer there to influence them. With an incentive trust, some or all of your assets are passed to the trust upon your death rather than directly to heirs. A trustee is empowered to distribute funds from the trust only if and when beneficiaries do whatever it is you have specified in the trust.

These trusts are not for everyone—some people consider it invasive to ­exert “dead hand” control over heirs, and others balk at their cost (expect to pay an attorney perhaps $2,500 to $5,000 to draft an incentive trust).

There are legal limits on what you can do with an incentive trust. And a poorly constructed trust could have unforeseen and unwanted consequences.

Still, there are times when this tool can be extremely useful…

Potential Uses

Common uses of incentive trusts…

Encouraging education. Your trust might pay college costs for your beneficiaries only if they earn specified degrees…and/or pursue specific majors.

Helpful: Consider placing limits on the number of years of education the trust will pay for so that you don’t unintentionally encourage beneficiaries to become “career students.” Some trusts require beneficiaries to maintain high grade-point averages. Do not set this GPA bar too high, or you might unintentionally discourage beneficiaries from choosing challenging majors.

Discouraging drug abuse. If you leave assets to a beneficiary who has used illegal drugs, your gift might end up in the pocket of a drug dealer, and your beneficiary might end up in worse shape than ever. An incentive trust could provide this beneficiary with his inheritance in small amounts over time, with each distribution contingent on passing a drug test.

Helpful: Be specific, so that the beneficiary understands exactly what he cannot do if he hopes to receive the money. Among the issues that you should think through before the trust is drafted…

Does a single failed drug test mean all distributions cease, or can the beneficiary request a retest and/or get a second chance by entering rehab?

Are only illegal drugs banned, or will abuse of alcohol and/or prescription drugs block distributions, too?

What if the beneficiary uses marijuana in a state where it is legal?

Will there be surprise drug tests?

Rewarding hard work. People who leave significant amounts to their heirs often fear that receiving this windfall will make their heirs slothful. An incentive trust could make distributions contingent on beneficiaries having full-time employment…or it could distribute assets by matching beneficiaries’ earned income. This way, the more a beneficiary earns by his own work, the more he gets from your estate.

Helpful: If assets will be distributed only to beneficiaries who engage in full-time employment, explain precisely what that means. Do they have to work 40 hours per week, or is 32 sufficient? Is self-employment acceptable? What if a beneficiary is laid off from his job—do you really want to cut off his inheritance when he needs money most, or can his distributions continue for a while as long as he is actively seeking employment?

Also, if your trust will match earned income, understand that different ­beneficiaries could end up with very different inheritances. A beneficiary who goes into investment banking and earns a bundle from his job will receive much more from your estate than the one who becomes a schoolteacher or firefighter or clergyman. If that’s not a result you would like, you could cap the income match each year so that a high-earning beneficiary cannot quickly claim the lion’s share of the assets.

Alternative: Some incentive trusts match the amount saved in retirement accounts rather than the amount earned, to emphasize thrift rather than earning power.

Rewarding specific life paths. An incentive trust might provide a financial reward for taking over the family business…entering a specific profession…launching a business…devoting time or money to charitable causes…getting married…not getting married until a certain age…remaining married…having children…being a stay-at-home parent…or many other life choices.

Helpful: Consider whether there are potential loopholes in the wording of your trust that a beneficiary could exploit. For example, if you try to encourage entrepreneurship by providing financial backing when beneficiaries launch companies, a beneficiary might start numerous “paper” companies that do nothing real. If there is no obvious way to close all the loopholes, you could grant your trustee the power to rule whether beneficiaries are following the intent of the trust before making distributions. (For more on this, see below.)

Whatever behavior you try to encourage, think through how your trustee will confirm that beneficiaries have met the terms. For example, will beneficiaries be required to submit tax forms or provide some other evidence upon request?

Legal Limits

Your incentive trust could be challenged by a beneficiary and struck down in court if it encourages things that are “against public policy”—that is, things that harm the state or its citizens. State laws vary, but in general, this includes…

Religious restrictions. A trust that encourages a beneficiary to leave a religion or adhere to a particular one is likely to be struck down if challenged.

Inhibiting marriage. A trust that provides a financial incentive to leave a particular spouse is likely to be struck down if challenged. A trust that discourages marriage in general (or specific types, such as same-sex marriage) falls into a gray area—it would come down to a particular judge’s ruling.

Speak with your estate-planning attorney about the limits that apply in your state of residence. If you move to a different state after having an incentive trust drafted, check with a lawyer there to see if anything needs to be changed.

Helpful: If you wish to include something in your incentive trust that is considered against public policy in your state but not in a different state, it might be possible to have your trust fall under that other state’s jurisdiction.

Choose the Right Trustee

For the best chance of your incentive trust having the effect you envision, tell your estate-planning attorney that you wish to include precise instructions in the language…but that you also wish to include language granting your trustee the right to use his discretion and that the trustee’s decisions should be final and binding. This accomplishes the following…

• Allows the trustee to make­ ­commonsense rulings. There might be situations where following the letter of the trust could have unintended and unfair consequences.

Example: Your trust provides financial incentives for heirs to have full-time employment, but one of your beneficiaries sustains a disabling injury and can no longer work. If your trustee has the right to use his own discretion, he could prevent this beneficiary from being disinherited.

• Makes it very difficult for beneficiaries to successfully challenge the trust or trustee in court. When a trust grants final decision-making authority to its trustee, it becomes almost ­impossible for beneficiaries to successfully argue that this trustee is not correctly implementing the trust’s terms.

The key is selecting the right ­trustee. This trustee must be intelligent enough to interpret your intent and have sufficient backbone to stand up to beneficiaries when necessary. The best solution is to name co-­trustees. Select an individual you believe will act with wisdom and strength (and a successor trustee who will do the same if this trustee can no longer serve) plus a corporate trustee from a bank or trust company. Fees paid to a trustee vary widely depending on the state’s fee schedules, the size and complexity of the trust, and conditions laid out in the trust.

Include language in the trust stating that funds will be distributed only when both trustees agree that the distribution is warranted. This way your individual trustee can handle mundane trust matters on his own…yet still deflect beneficiaries’ anger by blaming the corporate trustee when a request for funds is rejected.

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