By: Barry Siegel
Jack Cohn had it pretty good. At 20 he was a college student majoring in journalism at a great Ivy League college.
Tragically, during Jack’s junior year, his father died.
After the estate was settled, Jack received a check for almost $650,000.
There are at least two ways this true story could end up. The first is that Jack decides to invest wisely and goes on to finish college. The second is that he decides that college is not as important as fast cars and lots of parties. (Read the full article to learn what happened to Jack in real life.)
Most of us would like to think that our children and grandchildren could handle a sizeable inheritance.
The truth is that some would be able to deal with it while others would have great difficulty. As we all know, money can be both a great motivator and a great hindrance.
One way to turn money to your advantage is with an incentive trust.
An incentive trust is a trust which most often becomes effective when you die, though you could establish one while living. Assets in the incentive trust are used by the trustee for the benefit of your beneficiaries.
The key difference is that rather than outright distributions, the trust assets are used to encourage certain types of behavior.
For example, let’s assume that you believe your children should be rewarded for choosing a public service career.
This might mean teaching, politics, mission work or other types of employment that contribute to the public good but traditionally have not been considered high paying careers. You could design an incentive trust that would make distributions to your heirs if they decide to pursue such careers.
One way to do that would be to pay them a dollar or two in trust distributions for each dollar they earn in public service. We have seen situations where clients have used incentive trusts to help a child live a drug free lifestyle.
Like anything in life, incentive trusts have pros and cons.
Here are some of the issues to consider.
Incentive trusts can be used to motivate good and positive behavior.
They can be used to encourage good grades in school or completion of certain stages of education on time.
Incentive trusts can be used to reward a beneficiary for saving money or for living a healthy life style.
Many clients have established these trusts to reward entrepreneurship or stewardship of a family business. And of course incentive trusts can be used to encourage philanthropy.
One of the potential concerns with an incentive trust is the resentment that can be caused if your heirs feel you are controlling their behavior from beyond the grave.
Another potential issue is that children may come to rely on matching trust distributions and settle for a mediocre job choice rather than striving to reach ever higher goals.
This type of structure can also be an easy set up for disappointment if the trust goals for success are set unrealistically high or for some reason cannot be met by the beneficiaries.
Despite the potential for disadvantage, clients continue to establish incentive trusts. They do this because we take them through a process that allows them to think creatively about how to achieve the results they are looking for.
If this idea sounds attractive to you for your family, here are some things you can start thinking about.
Keep it flexible.
You never know how your kids or grandkids will turn out. Sometimes it is the child who drops out of college who goes on to create Microsoft.
Think about how you could use the trust to reward constant improvement. One way this can be done is by having your trustees and your beneficiaries consult and let your beneficiaries help to establish their own goals. This can encourage personal and professional growth in a way that does not require the imposition of your views and values on future generations.
Establish good communication.
One of the biggest problems we see in this area is the failure to let your children know why you set up the trust as you did. Failure to communicate your reasons may be one of the easiest ways to generate resentment after you are gone. Communication is the best way to insure that the trust works exactly the way you want it to.
Finally, consider allowing your trustees substantial discretion to work with the beneficiaries so that as times and people change, your trust can change as well.
Now, back to Jack.
Jack just inherited $650,000 outright. He used the money in the first week for a new BMW. He went back to school and told everyone what had happened. As a result, he became the bank for some of the craziest parties the college had seen in a long time.
One night, Jack was driving home from one of these parties and was in a serious car accident. His face was badly scarred and he suffered a number of broken bones. Luckily, no one else was hurt.
For Jack, it was a wakeup call. He called his dad’s lawyer a few days later and made an appointment.
The lawyer talked with Jack about how to put money into trust and set him up with a good investment counselor. He then told Jack to forget the money and go back to finish school as his father would have wanted.
The good news part of this story is that Jack did go back. He finished with high marks and now travels the world as a successful photo journalist.
If you think you may need to review or update, contact us to set up a time to discuss this with you.The Siegel Law Group, P.A. 1200 North Federal Hwy, Suite 200 Boca Raton, FL 33432 Phone: 561-955-8515