Families having enough financial resources that want to leave some to future generations often also want to leave their values to those same generations. Having worked hard for what they’ve earned, these families want to impart to their descendants not only the money itself, but how that money was earned.
And so with this in mind attorneys have helped clients draft provisions with various measures of control to achieve incentivized objectives. And in the interest of avoiding any potential for creating the stereotypical “Trust Fund Baby,” most would probably agree that controls and incentives are a good thing. Still, a trust that goes too far and sets burdensome or even impossible thresholds for control can cause a great deal of damage. Below are some examples of incentive provisions that may be drafted into a child trust fund.
Distributing Funds According to School Grades and GPA
Most people are familiar with the principles of college scholarships, where a student will receive the proceeds so long as he maintains a certain level of academic performance. In a child trust fund, language can be drafted in much the same way. Especially when the funds in the trust are to be used primarily for a college education, it is natural for the benefactor to expect some effort in exchange. But sometimes, this type of trust can not only be unwelcome or unnecessary, but unintentionally unfair.
The reality is that different students have different abilities, and sometimes schools don’t take into account that they learn in different ways. Moreover, expecting A’s from a student who chooses to major in Physics as opposed to one who would rather coast through a liberal arts degree doesn’t seem quite right either. The best advice is probably to set reasonable expectations, or some basic level of performance as a mere threshold to ensure the funds are being used somewhat wisely.
Tying Distributions to Income Earned Outside the Trust
Similar issues result from “matching” child trust funds that contribute dollar for dollar to a child’s outside earnings. If the fund was set up for two siblings, for example, who would otherwise have wanted to become a teacher and social worker, perhaps they would go for more lucrative careers. Or imagine the ill-will that might result between them if one took a much higher paying job than the other.
To avoid this, trusts have included multipliers for certain categories of low-paying jobs so that charity- or humanitarian- minded beneficiaries of the child trust fund wouldn’t sacrifice their good intentions for more money.
Exceptions are Important Too
Whatever incentives the trust may be tied to, it is good practice to incorporate exceptions to the general rule in planning for unpredictable events. A child or grandchild beneficiary would have little use for a college education fund, for example, if he didn’t have the money to pay for major surgery essential to his survival.
Or in the case of a woman, it is doubtful that the benefactors of a child trust fund would want distributions withheld if she wanted to stop working because she was pregnant. In fact, it is more likely that they would want her to take maternity leave. But without such language incorporated in the child trust fund language, there would be no such concessions to be made.
The Massachusetts Estate Planning Attorney Tools
While these are the general principles behind setting up a child trust fund, putting them into practice will require the experience and knowledge of an experienced Massachusetts estate planning attorney. There are some commonalities in how an incentivized child trust fund will materialize in form, however, and we’ve listed a few familiar characteristics here:
- Creating a Board of Trustees Where Beneficiaries Have a Minority Interest –
This ensures that the beneficiaries have some input, but not the power to effect a decision on their own. - Requiring Proof that Objectives are met for Incentives –
Documentation should be a requirement depending on the trust’s objectives. While grade and income records are reasonably easy to prove, proof of community service for example might not be. - Granting Ultimate Discretion to Trustee or Board –
Unforeseen circumstances are usually the most fatal flaws in any written document. Be sure to grant a healthy amount of discretion to the decisionmaking body of your child trust fund.
Alternatives to the Incentive Plan
A common provision we provide for, that can even be inserted into your will, is the creation of a trust that provides for education and health, but releases the principal of the trust in amounts corresponding to the older the child gets. This is with the understanding that age will bring responsibility, and is a very reasonable assumption. For more specific information about these trusts, and how they might work with your family, contact a Massachusetts Estate Planning Attorney at 508-888-8100 or on our Contact Us page.
