You will be better served to create a trust that rewards your adult children for achieving results than to use money to control every aspect of their lives.

There is an old saying, quite true, that wealth is difficult to amass but easy to squander … especially by those who did not earn it. Many parents – and grandparents – come to us asking how they can leave an inheritance to their loved ones, without “spoiling” them. They want the fruit of their labors – the wealth they pass on – to inspire their loved ones to greater causes, and not cause that dread disease known as “affluenza.”

Incentive trusts offer an opportunity to try and nudge younger generations to solid values, but as explained in a recent issue of Palisades Financial’s “Sentinel,” they don’t always work as planned.

An incentive trust can be a beautiful tool. Using it you can specify certain benchmarks to be accomplished before the trust can be unlocked. For example, you could specify that your child must graduate from college, get a full-time job, and maybe even become a philanthropist before some or all of the trust funds can be paid out. Alternatively, it can be arranged that the trust pays out to match the beneficiary’s annual income, thus offering the incentive to work harder.

The problem is that rigid incentives may defeat your purpose. Some beneficiaries may not learn the intended lessons, but instead learn how to “game the system” and work around the benchmarks either by technically meeting the requirements but not the lessons … or even forge diplomas and pay-stubs to sneak their way in. More worrisome, however, is the beneficiary who does become that “good person” you hoped for, but fails to meet the rigid benchmarks of the trust.

If the trust is too rigid, it may not instill the values you had hoped, but instead force a predetermined life-plan upon the beneficiary. The key to a successful incentive trust is a keen awareness of this problem. Sometimes, the same spirit can be better utilized within a results-oriented trust. These are a less intrusive arrangement without set benchmarks, but rather with guidelines to be pursued, a mission statement to be upheld, and the solid judgments of a trustee to carry out the spirit of the trust. The down side, of course, is that this is a more lax approach that may be easier to undermine.

 It is a difficult line to walk, but if you have come to appreciate the power of using your assets to instill good values then you also appreciate the importance of striking the proper balance. Your best course may be to consult competent counsel and share your unique situation and your goals, and then work together to design a plan with the greatest chance of success for you and your family.

Reference: Shomari Hearn, CFP®, EA. Sentinel. Palisade Hudson Financial Group LLC. (June 17, 2011)  “Do Incentive Trusts Encourage Responsibility?”