Tuesday, September 26th, 2017

Using Trusts to Manipulate Heirs?

January 9, 2012 by  
Filed under Estate Planning

Is Inheritance a Good Thing?

Many clients tell me that they just want their heirs to be able to access the family’s wealth as quickly and smoothly as possible, in equal shares. However, many clients have specific ideas about how the wealth should be used and when.

Adam and Shira want to support their children and grandchildren obtaining a secondary education. Sam and Liora harbor concerns about leaving large sums of money to their children and grandchildren prior to their gaining a true understanding of the value of wealth. Sharon and Jay want to ensure that their children marry within their faith.

All of these goals can be achieved by utilizing an incentive trust. Monetary gain can influence the behavior and goals of a loved one long after our death. A trust can dictate conditions that require such criteria as achievement of educational goals, healthier lifestyle choices, gainful employment, maintenance of religious choices and fulfillment of philanthropic endeavors. For example, trusts exist that direct the distribution of $1 to a beneficiary for each $1 the beneficiary earns with his or her own effort. A trust’s terms can encompass any conditions your imagination can conjure that a beneficiary must meet to receive distributions from a trust.

Of course, it should go without saying that an incentive trust should not be used as a punishment, but rather as a reward for goals met.

But How Does it Work?

“Adam and Shira want to support their children and grandchildren obtaining a secondary education.” (See above) To do so, they established and funded an incentive trust. A trust is a contract between the grantor and a trustee. An incentive trust by virtue of its terms, rewards a trust beneficiary monetarily for fulfilling the trust’s terms. Adam became the grantor of an incentive trust. He named himself as trustee, and then his wife, Shira as successor trustee, should something happen to him, and then he named his oldest daughter Aliza as successor trustee, should something happen to Shira.

The contract – trust agreement document – states that the trust will pay for any secondary education institution’s tuition for each of Adam and Shira’s three children and seven grandchildren. The trust will pay these amounts from any income that the trust’s assets will generate, and then from the assets themselves. A trust owns assets when the assets are re-titled to be owned by the trust.

Adam will re-title assets to be owned by the trust. Typically this is not a taxable event. It is merely an issue of paperwork. There are countless variations on this structure that other clients have utilized. Many opt to establish (create) a trust, but not to fund it until their death (i.e. have it own assets only upon death). For example, Adam’s Will could name the trust as Adam’s “heir”, and enable Adam to continue to manage the funds “from the grave”. But Adam wanted to set these assets aside to fund his children’s education even during his lifetime. He wanted to earmark these assets specifically for this purpose. He also wanted to encourage his children and grandchildren to attend school and to pave the way for them to be able to obtain academic degrees.

The reader can, of course, envision the infinite possibilities available to a family who wishes to encourage their children and/or grandchildren in a similar fashion – I have even written trust agreements for clients that specify which educational track or degree must be pursued, splitting the cost with the beneficiary until the degree is attained and then reimburse the beneficiary.

Adam’s trust agreement also provided that the trustee shall pay the student’s rent, utilities and grocery bills for the duration of their secondary education. When the youngest grandchild reaches age 32, Adam’s trust agreement states that any amounts remaining in the trust will be distributed to a charity in part and to Adam & Shira’s grandchildren in equal shares. Appropriate wording of the trust agreement can ensure that it does not fall into various tax traps, such as Generation Skipping Transfer Tax (i.e. transferring to a grandchild).

An incentive trust is a tool that can help your family more accurately implement your plan for distributing the wealth that you have worked so hard to accumulate. I realize that it is a controversial tool, so please feel free to comment!

* All names are fictitious throughout this article

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Experienced US Estate Planning Attorney Felicia M. Seaton understands what your estate plan should include to maintain your family’s best interests throughout difficult times. She can help you formulate a thorough plan to give you peace of mind. Contact her today click here or call 0526182582/US: 3028923336.

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