Investor Warren Buffett once said that the ideal inheritance is “enough money so that they feel they could do anything, but not so much that they could do nothing.” Indeed, if you’ve worked a lifetime and built up a substantial amount of wealth, you may be uncertain about how your family members will handle their inheritances. Using incentive trusts in your estate plan may be the vehicle that gives you peace of mind.

Be positive

For many people, it’s important to share one’s values and encourage their children or other heirs to lead responsible, productive and fulfilling lives. An incentive trust essentially conditions asset distributions on certain behaviors or achievements that you wish to inspire.

Incentive trusts can be effective, but plan and draft them carefully to avoid unintended consequences. Begin by focusing on positive reinforcement.

For example, your trusts could emphasize such behaviors as going to college or securing gainful employment. By accentuating the positive, you can discourage negative behavior; it’s difficult for a substance abuser to stay in school or hold down a job.

Avoid negative reinforcement, such as conditioning distributions on the avoidance of undesirable or self-destructive behavior — for example, gambling or drug use. This sort of “ruling from the grave” is likely to be counterproductive. Not only can it lead to resentment on the part of your heirs, but it also may backfire by encouraging them to conceal their conduct and avoid seeking help.

Be flexible

Leading a worthy life means different things to different people. Rather than dictating specific behaviors, it’s better to establish the trust with enough flexibility to allow your loved ones to shape their own lives.

For example, some people attempt to encourage gainful employment by tying trust distributions to an heir’s earnings. But this can punish equally responsible heirs who wish to be stay-at-home parents or whose chosen careers require them to start with a low-paying, entry-level job or an unpaid internship. A well-designed incentive trust should accommodate nonfinancial measures of success.

As you think about the incentives you wish to provide, avoid the temptation to “buy” desired behavior. Suppose, for example, that your trust provides generous distributions to a daughter who cares for her children full-time. But what if she really wants to work outside the home? If the “stay-at-home bonus” is too large, she may feel she has little choice. A better approach may be to reward your heirs for a variety of positive options and allow them to choose their own paths.

Rather than imposing a complex, rigid set of rules for distributing trust funds, you might consider using a “principle trust.” These trusts guide trustees’ decisions by setting forth guiding principles and values, then providing trustees with discretion to evaluate each heir on a case-by-case basis. Bear in mind that for this strategy to work, your trustee must be someone you trust to carry out your wishes.

Seek professional help

An incentive trust doesn’t need to be an all-or-nothing proposition. You’ll want to offer sufficient funds to your loved ones to provide for their basic needs and base additional distributions on the behaviors you wish to encourage. Your estate planning advisor can help you achieve the right balance for your incentive trust based on your family’s situation.

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