I have a grandson that stands to inherit a lot of money by the time he turns 18.

I think that is too young to have access to hundreds of thousands of dollars. Since he is my potential heir as well, will a trust help me from contributing to this situation and instill in him a sense of responsibility?

Yes. Many grandparents and parents have worked hard to accumulate wealth and it is easy for those that are inexperienced to foolishly spend assets and develop a sense of entitlement without regards for the physical and mental effort it took to produce and grow money in the first place. To encourage core values, work ethic and financial savvy, many grandparents and parents are turning to incentive trusts, which control how and when their heirs receive funds.

To be effective an incentive trust needs a clear statement of the goals the grantor has in mind, kind of like a mission statement. Nevertheless trustees are often given wide discretion in distributions so it is extremely important to choose the trustee and alternate trustee(s) wisely and communicate with them early on as to your goals. The trust should contain provisions to indemnify the trustee when he/she makes discretionary decisions to cover health care or living costs, which would be important if your grandson was injured, became chronically ill or disabled and cannot work.

Third, you need to determine what kind of milestones you want to reward or if you just want to delay distributions of principal until a certain age(s). A typical age=maturity plan might require interest only be paid for educational purposes until after graduation from college or a trade school, or being licensed by the state to do something like sell real estate or age 22, then 1/4th of the principal is distributed to pay off college debts, put a down payment on a house or purchase a new vehicle, allow for travel or post graduate degrees. Then another portion of the principal is paid out when the beneficiary turns 30 or 35, presumably after he has had to work and establish himself in a career. The balance is paid and the trust is terminated at age 40 or 45 when hope-fully thoughts are turning toward debt elimination and saving for retirement.

A milestone plan might reward for exhibiting the required goals such as being married, having a first child, proof of investments, starting a business etc. If you want to tier distributions to the beneficiary’s salary, for example – where if he makes $20,000 he gets $5,000 and if he earns $40,000, then he gets $10,000, – then the trust must authorize the trustee to request and review a copy of a tax return for the grandson, before any distribution is made.

You have to be careful not to control every aspect of your grandson’s life because you don’t want to penalize him for choosing to enter the Peace Corp or be a school teacher, rather than CPA who will potentially earn more. Focusing solely on preconceived results can push benefi-ciaries into careers or marriages that are not fulfilling and away from developing certain talents that will bring personal joy and benefit to the world.


Disclaimer:  Information contained in this column is meant to be of general information on frequently asked questions concerning disability, elder law, estate planning and probate law, and does not contain specific legal advice to a client.  No attorney-client relationship is created by reading this column.

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