A Twist on Inherited Wealth: Provide Incentives

By July 19, 2019July 9th, 2021No Comments


For many affluent individuals, estate planning extends well beyond tax planning. It involves very personal decisions about the distribution of future wealth.

Spendthrift trusts are sometimes used in traditional estate planning. These trusts can distribute income and limit access to the trust principal. They can provide minor children a financial head start. And they can protect adult heirs from some creditors and their own bad judgement.

The downsize? These trusts provide no incentives to expand heirs’ professional, academic, or philanthropic horizons.

Inheritance With An Asterisk

To counter this, some affluent individuals choose to establish an incentive-based estate plan. One of the cornerstones of this planning is a family incentive trust (FIT). These trusts allow the grantor to set expectations about the uses of their estate funds.

A FIT can also help ensure proper care and financial support if an heir falls on hard times or has special needs.

The unique aspect of a FIT is that the general distribution of trust income is based on a series of predetermined “incentives.”

Promoting Success and Reinforcing Values

The incentives outlined in a FIT are at the discretion of the grantor. Each incentive provides the opportunity to encourage specific future behavior. For instance, the trust could pay each heir $10,000 on acquiring a bachelor’s degree, $25,000 for a master’s degree, and $50,000 for a doctorate.

A FIT can reward younger heirs for academic success or community involvement. The trust can also match certain levels of income for heirs who are younger than a specified age.

A FIT can also be a good way to fund education. Typical custodial accounts become the property of the child once he or she attains the age of majority (determined by state law). A FIT can dictate that some trust assets should help cover education costs. Thus, the trust – rather than a young, inexperienced adult – can maintain control of the education funds.

Other Uses of a FIT

Another interesting use of a FIT is treating the trust principal as a “family bank.” The FIT can offer low-interest-rate loans for start-up businesses or buying a home. The FIT establishes a lending process like that of a traditional lender.

Philanthropy creates another possibility. A FIT can match the charitable contributions of a beneficiary. Because the contribution comes through the beneficiary, they get double the tax deduction!

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Sometimes, inherited wealth can have a negative impact on the motivation of heirs. A large inheritance may lead to a life of leisure. With a FIT, heirs get money to realize career or academic goals. They get money for actions consistent with the expectations of an affluent grantor. For the grantor, they can promote a family legacy of excellence and productivity for generations to come.

Elliott Weir, CFP

Elliott Weir, CFP

I work with recently widowed women looking for a different kind of relationship with a financial adviser. No products sold, no costs hidden, and no pressure for hasty decisions - all for a clearly disclosed fixed fee. For those women wanting the patient guidance of an experienced professional paid only to help them, III Financial offers a distinctive alternative to typical insurance agents, investment managers, and wealth managers.

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