While an inheritance is nothing more than the transfer of property or money to a beneficiary, many clients hope it will enhance the beneficiary’s life well into the future. Clients may wish to secure basic necessities for a child. They may want to ensure it encourage a child’s productivity or positive behavior. Clients may also hope an inheritance will carry forward certain family values.
A trust can be a good estate planning vehicle to direct how an inheritance can be used. With a trust, a grantor (the individual who creates the trust), can direct that an inheritance be limited to certain purposes, distributed only for certain items, or be used only under certain circumstances. The provisions and purposes of a trust can be as unique as the beneficiary and as creative as the grantor. However, there are some common provisions most clients consider when using a trust to encourage beneficiary behavior.
Distributions to Encourage Beneficiary Education
Many clients want to ensure their children and grandchildren obtain an education. An inheritance held in trust and distributed for educational purposes is one way to accomplish this goal. The simplest way is to direct the trustee to pay the educational expenses, such as tuition, fees, and books to the educational institution the beneficiary attends. A limit can be set on either the amount or level of education for which the trust will pay. A more complex distribution scheme can be devised to encourage obtaining advanced or professional degrees, trade certifications, study abroad opportunities, or specific fields of study. Distributions can be made dependent upon a beneficiary maintaining a certain grade point average, taking a particular course load, or attending a certain type of educational institution. Additional distributions for living expenses or cultural activities can be included depending on a beneficiary’s circumstances.
Distributions to Encourage Productivity
Clients are often concerned an inheritance will discourage a beneficiary, particularly a young one, from working. They may worry a beneficiary will choose to live a lavish lifestyle on the inheritance instead of continuing work or going to school. Trust provisions that encourage work or academic success, also known as “incentive distribution schemes” are commons ways clients encourage productivity. If a beneficiary is in school, cash distributions from the trust can be made only if the beneficiary maintains a certain grade point average while maintaining a certain course load. For beneficiaries who are not in school, simple incentive distribution provisions can limit cash distributions to only modest housing, unless the beneficiary is gainfully employed. More complex distribution schemes can encourage employment by matching a beneficiary’s earnings with dollar-for-dollar cash distributions from the trust. If entrepreneurship is encouraged, trust distributions can be made to allow beneficiaries to start businesses. The only limit on encouraging productivity is a grantor’s imagination.
Distributions to Discourage Substance Abuse
Substance abuse is a difficult issue for many families. More and more clients are asking that trust distributions be conditioned on beneficiaries proving they are drug or alcohol free. The simplest way to limit distributions to a beneficiary with a substance abuse problem is to condition any distribution on proof the beneficiary is free of alcohol or drugs for a certain period of time before a distribution. In more complicated situations, distributions may be conditioned on continued participation in drug and alcohol counseling, completion of in-patient rehabilitation programs, or remaining free of any further criminal or traffic violations related to drugs or alcohol. Similar provisions can used to encourage mental health treatment, discourage gambling, or limit a trust’s support for other detrimental behavior by a beneficiary.
Distributions to Encourage Home Ownership
Most clients want their beneficiaries to secure a home. Trust distributions encouraging home ownership are an easy way to help with this. A simple trust provision can direct distribution for purchasing a home or, in smaller estates, making a down payment on a home. In more complex estates, a trust can purchase a home and allow a beneficiary to buy it from the trust when possible or under certain conditions. Trust distributions to support home ownership can also be used to encourage reasonable and responsible home ownership. Distributions can be limited to a particular amount, type of home, type of construction, or even periodic home maintenance. If a beneficiary might be financially irresponsible or have special needs, the trust should be allowed to maintain ownership of the home.
Distributions to Encourage Long Term Savings & Planning
Finally, because our life expectancy is increasing, many clients want to encourage beneficiaries to use their inheritance to save for retirement. One of the easiest ways to do this is to create a trust that distributes over a longer period of time, including into a beneficiary’s retirement. The downside is the need for a trustee that will outlive the beneficiary. If a long term trust is not a good option, a distribution scheme that matches distributions to a beneficiary’s yearly retirement savings is a simple option to encourages retirement savings. A more complex scheme could include distributions based on the amount of money that could have been saved during a year for retirement, either through an employer or privately, to encourage use of these savings techniques. Tying distributions to retirement savings alone may not be an option for younger individuals or beneficiaries with disabilities. In a case of a beneficiary with a disability, trust provisions authorizing distributions to an ABLE Account may be a better way to encourage saving.
Estate planning can and should be more than just a transfer of property from one generation to another. Your estate plan can protect a beneficiary’s quality of life, elicit positive behavior, and help plan for their future. For more information about how you can utilize your estate plan for the best outcomes for your beneficiaries, contact an elder law attorney near you.