No TV until you've finished your homework!"
"After you eat your spinach, you can have some ice cream."
Power
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Most parents use incentives like these to encourage their children
to do what's in the kids' own best interest. By holding out something their children
want—or by withholding it—parents hope to persuade or cajole them into developing
good habits and a healthy lifestyle. In recent years, many wealthy parents have chosen to extend this carrot-and-stick
approach into their children's adult lives through an estate-planning tool called
a family incentive trust (FIT). Like a traditional trust, an irrevocable FIT offers
significant financial advantages, such as protecting your assets from a malpractice
suit and minimizing the cost of probate after your death. But unlike other trusts,
a FIT requires beneficiaries to meet certain conditions before they can gain access
to the trust's assets. Although there's no minimum amount
you need to establish one, a family incentive trust makes better sense for people
who have assets totaling $1 million or more. That's because the fees associated
with setting up and maintaining a FIT can easily cost many thousands of dollars.
(We'll get into more detail later.)
What kinds of conditions
can you attach to a family incentive trust? Typically, grantors (creators of trusts)
require beneficiaries to achieve certain goals before receiving any significant
disbursements from the trust. For example, a beneficiary may earn "bonuses" for
graduating from college, maintaining a certain grade point average, or earning
a master's degree. Or a trust may match the beneficiary's annual earnings, make
payments contingent upon gainful employment, or reward either successful entrepreneurship
or staying in the family business. (Many grantors allow trust allocations to help
achieve those goals—for instance, to pay for college expenses or to help with
business start-up costs.)
Grantors can also attach "negative"
conditions—provisions prohibiting drug or alcohol abuse, gambling, chronic debt,
or criminal convictions. Grantors may put a time limit on education to discourage
their children from becoming perpetual students. Some cut their children off if
they marry out of their parents' faith, while others require their child to obtain
a prenuptial agreement in order to receive disbursements after marriage.
In short, you can add virtually any conditions to limit the disbursements
from a family incentive trust. "I try to talk my clients out of including any
weird conditions," says Ventura, CA, attorney Roy Schneider. "Incentive is one
thing, but control is quite another." Still, as Lori Wolf, an estate-planning
attorney in Hackensack, NJ, says, "Really, the sky's the limit—whatever you want.
You can be as creative as you want to be."
Why
would you want a FIT? People who, through their own initiative and
hard work, have built a sizeable fortune often worry that their money might spoil
their children or grandchildren. They want to provide for their heirs, but at
the same time, they're concerned about the possible corrupting influence of large
sums of money. As a client once told James R. Strull, a Hackensack attorney, "I
don't want my children grieving on a yacht."
In establishing
a family incentive trust, grantors hope that the conditions they attach will instead
spur their heirs on to bigger and better things. However, as Marc Singer, of Singer
Xenos Wealth Management in Coral Gables, FL, cautions, "There's a thin line between
looking out for your children's best interests and trying to control their lives."
Still, if handled properly, a FIT can be useful.
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