Motivating Heirs of Large Estates

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Parents are often concerned with how the wealth they leave behind will affect their children. Some fear that their inheritance may make their children lazy, idle, and spoiled, with no work ethic or desire to leave any positive contributions to the world. One way that this problem can be solved is through the use of incentivized inheritances. These types of inheritances are linked to certain conditions that can help a benefactor and guide the lives of their beneficiaries to ensure that they are ready for their inheritance. However, incentivized inheritances are doubled edged swords. Though potentially very useful, they can lead to unintended consequences and unwanted results if drafted without knowledge, experience, and great care.

Education Incentives

Often, the distribution of an incentivized trust will be contingent on either enrolling in or successfully completing a college education. These conditions can also be linked to the inheritance of a business—by requiring your child to obtain a college degree prior to inheriting a family business, you can both encourage your beneficiary to get an education, and increase the chances that the business will be run successfully.

Beware of being too narrow with your incentives:  when incentives are too specifically targeted your child may lose out on opportunities and add unnecessary stress as they mature into adulthood and start making major life decisions.  You may wish, for example, that your child will obtain a medical degree, but having their inheritance contingent on going into a specified field may lead to problems. The beneficiary may go into that field against their true desires in order to receive their inheritance, or they may choose to follow their own path in life, completely giving up their access to the trust assets.

Be realistic.  Even well-intentioned education incentives can have unintended consequences: not everyone has the desire or ability to pursue higher education, and health concerns and financial problems can also prevent someone from attending college. In cases like these, preventing the distribution of a trust will do more harm than it will good. When this type of situation prevents a potential beneficiary from accessing their inheritance, this is rarely intentional. For this reason, prescriptive trusts like this should be drafted carefully in order to allow for a more realistic, customized approach.

Salary Incentives

Income-based incentives are also not without their pitfalls. In general, they tend to presuppose the value of a high salary above other considerations. A trust that, for example, disburses yearly in an amount that matches a beneficiary’s income, may drive an individual to choose a high-paying career path over one that is more beneficial to society. Despite these considerations, there is a time and place for an income-linked incentive—but the inclusion of these incentives should be determined carefully, not as a one-size-fits-all solution.

Good Behavior Incentives

A third approach to incentivizing inheritances is to link distribution to the successful fulfillment of various moral criteria set by the benefactor. This type of incentive is typically called a good behavior incentive. However, there is a very fine line between what is and is not legally acceptable when it comes to these types of incentives. Incentives cannot be based on personal preferences. Courts almost always reject any requirements based on politics, religion, or other categories which have been determined to be void when it comes to the validity of a trust. Others, like requiring a beneficiary to pass a drug test, are technically allowed but are often unenforceable due to HIPAA and other medical privacy laws. Subjective conditions (such as a requirement that a beneficiary be “of high moral character”) are similarly hard to enforce and should also be avoided. Unfortunately, the divide between what is and is not objective or arbitrary can often seem just as objective and arbitrary, so it is important to discuss any incentive strategies that may toe the line with an experienced estate planning attorney.

We Can Help

Though incentivized inheritances can potentially be a useful way to help your beneficiaries make the most of their lives, poorly drafted incentives can lead to resentment and other unintended consequences. Like many other estate planning tools, they can be useful, but only when applied carefully and with the guidance of an experienced estate planning attorney who will get to know you and your unique situation. To meet with a Bailey Law Firm attorney to discuss this or any other estate planning issues, please contact us with any questions online or by calling our office at 832.510.2900 to schedule a complimentary consultation.