February 2008Newsletter

How to Influence a Beneficiary’s Behavior

Wealth Planning Update

A trust can be drafted to accomplish virtually any type of goal. The first step in designing a trust for your heirs should be for you to determine your goals and to determine how you would like the trustees of the trust to administer the assets in a manner consistent with such goals. Many individuals design their trusts to encourage what they perceive to be desirable behavior and to discourage undesirable behavior.

The typical types of behavior individuals typically seek to encourage include education, productivity, service or altruistic behavior, stewardship, and philanthropy. Many individuals design trusts to discourage undesirable behavior, including unreasonable consumption of assets, sloth, self-destructive behavior and financial mismanagement.

There are multiple techniques in designing a trust to influence behavior. One common approach is to simply utilize a discretionary trust. You should provide clear guidelines to the trustee as to the exercise of discretion. Conversely, an incentive trust provides that beneficiaries will receive distributions if and only if they meet certain specific, objective, measurable criteria.

An incentive trust design can remove subjective factors that can work against your stated objectives. By introducing objectivity, an incentive trust makes it harder for a beneficiary to manipulate the trustee. Through an incentive trust, the beneficiary is encouraged to meet objective factors established by the creator of the trust.

In designing a trust for your beneficiaries, you may want to consider some of the following incentive/disincentive provisions discussed below:

  • Matching earned income up to a specified amount.
  • Specifying an amount of funds to set up a professional practice or start a business.
  • Providing a specified payment to a stay-at-home parent.
  • Receiving additional distributions each year that a beneficiary has no driving violations.
  • Receiving additional distributions while the child is under certain specified treatment.
  • Denying distributions if, upon marriage, the beneficiary does not enter into a premarital agreement.
  • Denying distributions upon the failure of a drug test.

Receiving distributions to assist a beneficiary in crisis situations, such as divorce, or during a period of involuntary unemployment.

In addition to deciding the proper balance between discretionary and incentive trusts, you also should give consideration to incorporating other techniques within your estate plan. It is possible to design a trust for the benefit of your children that could provide fixed distributions to them with the excess cash flow flowing to a charity.

Your trust can provide for communication directives to and from your beneficiaries. The trust could require annual meetings between the beneficiaries and the trustee. Financial status of the trust could also be reviewed with your beneficiaries in order to give the beneficiaries a sense of ownership. The meetings could be designed to educate the beneficiaries. A beneficiary can be required to meet with the trustee on a regular basis. In the case of a discretionary trust, the trust can require that the beneficiary provide detailed information to the trustee in order to obtain a distribution.

Consideration needs to be given to which individual or individuals should serve as trustee. The trustee’s role is that of a coordinator and facilitator. You could designate certain types of trustees, such as administrative trustees, investment trustees, or distribution trustees. At some point in time a beneficiary could become a co-trustee or sole trustee over his or her trust.

The design you establish for your trust can assist you in helping to pass along your ideals about family values, philanthropic responsibility and work ethics to your beneficiaries. A trust can be designed to simulate the terms under which you would have administered assets and made distributions to your beneficiaries.

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