Incentive Trusts: Ensuring That an Inheritance Will Be Well Spent

Many parents or grandparents with sizable amounts of money to pass on to their heirs are apprehensive about the effect it many have on their children or grandchildren. In some instances, they fear that the recipients will misspend the funds on drugs, fancy cars or failing businesses. In other cases, the fear is simply that their children will lose their drive to achieve and overcome barriers that may present themselves if there's no financial necessity to do so.  

At the same time, these parents and grandparents want to provide a safety net to their heirs and enhance their lives in an increasingly insecure financial system. Often, they do so by leaving funds for their descendants in a trust that distributes the funds at certain ages – say, one-third at age 25, one-third at age 30 and the rest at age 35.  But some parents set up what are known as “incentive trusts,” which get very specific in their instructions to trustees to ensure that the trust funds support what the trust's creators view as positive behavior and discourage unproductive activities.  Such trusts may pay the costs of certain activities, like a college education or advanced degree, or provide rewards for achieving various milestones.  Others may withhold distributions when the beneficiary engages in certain negative behaviors or activities, such as drug use or excessive spending.

Here are some ways incentive trusts might be structured:

1. Rewards for degrees. Cash amounts that descendants receive on achieving specified educational milestones.

2. Matching earnings. The trustee would be instructed to match on a dollar-for-dollar basis the child’s earnings from employment, or, if lavish spending is the concern, the child’s savings.

3. Paying for education. Especially with the high cost of private universities today, grandparents often set up funds to help pay for education. Some funds are more expansive than others in terms of what they will cover. Just undergraduate degrees, or also graduate programs? Only for higher education, or also for learning a craft or a trade? Will the fund pay for private school before college? Will it cover educational programs during the summer, including travel overseas? Room and board, or just tuition? Some of the answers will be determined by the size of the fund and how far it needs to stretch.

4. Creating a charitable foundation or donor-advised fund. To encourage charitable giving among descendants, an estate plan could require heirs to give away a certain amount every year to a private foundation or to a donor-advised fund.

5. Subsidizing public service career or Peace Corps. We live in an increasingly financially insecure world that often forces people to take or stick with careers they don't find fulfilling or don't feel further the public good. Parents or grandparents could fund trusts that don't match all earnings, but just those they feel make the world a better place. This may be hard to define and will, of course, be different from fund to fund. It may include working for any not-for-profit -- though some are quite well funded -- or teaching or political organizing for certain causes.

6. Distribution upon marriage or having a child.

7. Matching the downpayment for a house.

8. Reward for a period of time being alcohol- or drug-free.

Through these incentive trusts, parents and grandparents hope that their money will go to causes they support. On the one hand, this approach can multiply the benefit of what they pass on. On the other, it may seem to some that the deceased is trying to continue to exercise control much too long after they are gone. Often the older generations split the difference, giving some funds outright to their descendants and leaving the rest in trust.

However, an incentive trust must be carefully constructed, both to ensure that its terms are clear and that it does not violate any constitutional or public policy law or standard. For example, in one case that ended up in the courts, grandparents set up a trust that withheld funds from any grandchildren who married outside the Jewish faith. Two Illinois courts ruled that the clause disinheriting the grandchildren was invalid because it was against public policy by placing a significant limitation on the grandchildren's freedom to marry.

If you are interested in creating an incentive trust, speak to your elder law or estate planning attorney.   

For two articles by WealthManagement.com that go into detail about the objectives that may be achieved with an incentive trust and the critical elements of incentive trust design, click here and here. 

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Elise Lampert, Esq.

Law Office of Elise Lampert 

9595 Wilshire Blvd. | Suite 900 | Beverly Hills , CA 90212

Phone: (818) 905-0601 / Email: elise@elampertlaw.com

https://www.eliselampert.com

 So.............., When The Pool Boy Ends Up With Grandma’s House, Call me!

What Is Financial Elder Abuse?

Financial elder abuse involves taking advantage of older people and unfairly benefiting from their monetary resources. Family members, business associates, caregivers, and strangers sometimes financially abuse elders by taking advantage of their trust. Tactics involved in financial elder abuse include the unauthorized use of an older person’s assets, gaining power of attorney by way of trickery, or engaging in fraud.

Contact Us:

Elise Lampert, Esq.

Law Office of Elise Lampert

9595 Wilshire Blvd., Suite 900

Beverly Hills, CA 90212

Tel. 818-905-0601

Email:elise@elampertlaw.com

www.eliselampert.com

 

Why You May Need a Trust in Addition to a Power of Attorney

While everyone should have a durable power of attorney that appoints someone to act for them if they become incapacitated, in some circumstances it is not enough. In these cases, a revocable trust can help. 

A durable power of attorney allows you to appoint someone you trust to step in for you to handle financial and legal matters if you become incapacitated. We all are at risk of incapacity from illness or injury, whether temporary or permanent. Of course, this risk rises as we get older. Without someone in place to handle legal and financial matters, bills can go unpaid, contracts can't be signed, homes can't be refinanced, leases can't be terminated, investments go unmonitored and unadjusted, and families often fight over who is in charge. The remedy of seeking court-appointed conservatorship is expensive, cumbersome, and time-consuming. It's best that you pick your own person or people for this role.

Nevertheless, however important taking this step can be, it's not always enough. There are two reasons for this: financial institutions often don’t honor older powers of attorney and agents sometimes don't step in until it's too late. Both problems can be remedied through the use of a revocable trust.

Powers of Attorney Can Be Rejected

Financial institutions often reject older powers of attorney, claiming that they can't know whether the document has been revoked since first signed. Sometimes the institution will require the drafting attorney to attest to the fact that the document hasn't been revoked, even though the attorney may not have met with the client for many years and, of course, can't know everything the client did during that time.

Financial institutions are uncomfortable honoring powers of attorney because they do not want to be held liable for any malfeasance by the agent appointed under the document. In the opinion of most estate planning attorneys, such institutional rejection is contrary to law, but there is no good remedy when this occurs since any lawsuit against the likes of Bank of America or Fidelity will be expensive and time consuming.

Fortunately, there are three ways to avoid this institutional intransigence:

• Refresh your documents periodically. Financial institutions are more accepting of newer documents than older ones, so it's a good idea to execute new durable powers of attorney every five years. Of course, this is perverse. If the power of attorney is being used because of your incapacity due to dementia, you are more likely to have been experiencing cognitive challenges a year prior to its use than ten years earlier.

• Use the financial institution's forms. Most banks and investment companies have developed their own durable power of attorney forms that they are more comfortable accepting than general ones you may have found online or the one your attorney prepared. Contact each financial institution where you have an account and ask whether it has a durable power of attorney form. You'll still need a general durable power of attorney, since the financial institution's form only governs accounts held at that institution, but using its form should prevent any problems with its acceptance.

• Create a revocable trust. Financial institutions seem to accept revocable trusts more readily than durable powers of attorney. Revocable trusts have the added advantage that you can appoint a co-trustee to serve with you, so that if you become incapacitated, the co-trustee can step in and act.

A Trust Provides Financial Protection

As we age, we all become increasingly susceptible to making financial mistakes and falling victim to scammers. Having a financial advocate in place can help avoid both. An important step is to name an agent under a durable power of attorney. However, such agents often don't step in until it's too late and the senior has already lost a significant amount of money.

A co-trustee on a revocable trust, however, is already named on the accounts in trust. Even if the co-trustee doesn't take an active role, he or she can monitor the accounts to make sure nothing untoward is occurring. Further, when it's necessary to step in, the co-trustee can do so immediately and seamlessly. In contrast, an agent under a durable power of attorney must present credentials to the financial institutions and go through the institution’s vetting procedure, delaying access to accounts and prohibiting the agent from protecting the accounts or being able to pay bills on behalf of the grantor.

Conclusion

For these reasons, revocable trusts often work better than durable powers of attorney. However, two caveats are in order: First, trusts only control the accounts actually held by them. So, for the trust to work, you must retitle your accounts into your trust.

Second, even if you have a revocable trust, you still need a durable power of attorney. This is for two reasons: First, you may not have transferred all your accounts into the trust and will need to give your agent control over those accounts and the ability to transfer them into the trust. Second, the trust only governs financial matters. Your agent under your durable power of attorney can also handle legal ones on your behalf, including signing your income tax returns.

Contact you attorney to find out if a revocable trust is right for you. 

Contact us

Elise Lampert, Esq,

Law Office of Elise Lampert

9595 Wilshire Blvd. | Suite 900 | Beverly Hills , CA 90212

Phone: (818) 905-0601 / Email: elise@elampertlaw.com

https://www.eliselampert.com