Estate Planning: Parenting from the grave

July 8, 2005

This estate-planning tool allows you to dole out your assets on your terms. But could it backfire?

No TV until you've finished your homework!"

"After you eat your spinach, you can have some ice cream."

Although there's no minimum amount you need to establish one, a family incentive trust makes better sense for people who have assets totaling $1 million or more. That's because the fees associated with setting up and maintaining a FIT can easily cost many thousands of dollars. (We'll get into more detail later.)

What kinds of conditions can you attach to a family incentive trust? Typically, grantors (creators of trusts) require beneficiaries to achieve certain goals before receiving any significant disbursements from the trust. For example, a beneficiary may earn "bonuses" for graduating from college, maintaining a certain grade point average, or earning a master's degree. Or a trust may match the beneficiary's annual earnings, make payments contingent upon gainful employment, or reward either successful entrepreneurship or staying in the family business. (Many grantors allow trust allocations to help achieve those goals-for instance, to pay for college expenses or to help with business start-up costs.)

Grantors can also attach "negative" conditions-provisions prohibiting drug or alcohol abuse, gambling, chronic debt, or criminal convictions. Grantors may put a time limit on education to discourage their children from becoming perpetual students. Some cut their children off if they marry out of their parents' faith, while others require their child to obtain a prenuptial agreement in order to receive disbursements after marriage.

In short, you can add virtually any conditions to limit the disbursements from a family incentive trust. "I try to talk my clients out of including any weird conditions," says Ventura, CA, attorney Roy Schneider. "Incentive is one thing, but control is quite another." Still, as Lori Wolf, an estate-planning attorney in Hackensack, NJ, says, "Really, the sky's the limit-whatever you want. You can be as creative as you want to be."

Why would you want a FIT? People who, through their own initiative and hard work, have built a sizeable fortune often worry that their money might spoil their children or grandchildren. They want to provide for their heirs, but at the same time, they're concerned about the possible corrupting influence of large sums of money. As a client once told James R. Strull, a Hackensack attorney, "I don't want my children grieving on a yacht."

In establishing a family incentive trust, grantors hope that the conditions they attach will instead spur their heirs on to bigger and better things. However, as Marc Singer, of Singer Xenos Wealth Management in Coral Gables, FL, cautions, "There's a thin line between looking out for your children's best interests and trying to control their lives." Still, if handled properly, a FIT can be useful.