The role of estate planning is most commonly considered to be about transferring assets from one generation to the next in the most efficient manner possible (e.g., how to minimize the burden of estate taxes and avoid the public spectacle of the probate process). And yet, looking at estate planning solely through the lens of assets on a balance sheet can make it easy to overlook the reality that people often have other, intangible assets that they wish to pass on to the next generation, such as values, lessons, and opportunities to pursue lifelong passions that can’t be achieved – and in many cases may be contradicted – by a simple transfer of cash.
So it often makes sense to think of estate planning not only in terms of which assets go to which person, but also in terms of how best to use those assets to incentivize the types of behavior that the assets’ owner wants to instill in their heirs. As while will-based transfers and cash gifts generally impose no restrictions on how they’re used by their beneficiaries, certain types of trust-based estate plans can allow an individual to set very specific guidelines for how their assets are held and under which circumstances they can be distributed.
The most common example involves trust provisions that direct assets to be distributed to beneficiaries once they obtain a certain age (e.g., at age 21 or 30) or stagger distributions at multiple ages. However, it’s possible to get much more specific and to allow distributions that are tied to specific conditions that incentivize the beneficiary, such as academic achievements (like maintaining a certain GPA or attaining advanced degrees), life events (like getting married or buying a first home), or even the level of the beneficiary’s own earned income (like allowing for ‘matching’ distributions equal or in proportion to the amount of income that the beneficiary earns).
In addition to incentivizing behaviors, trust provisions can also include tools to disincentivize certain behaviors. For beneficiaries who have known behavioral issues such as gambling or substance abuse, the trustee may be able to delay distributions until there is evidence that the behaviors have been curtailed. Likewise, an individual wanting to avoid litigation or family conflict as the result of a contested estate (e.g., by a family member who feels they were treated unfairly) can include a “no contest” clause that effectively disinherits anyone who takes legal action against the estate.
The key point is that as with most financial planning topics, advisors can play a role in helping to guide clients to the most appropriate solutions for their goals, including how to carry on their legacy of personal values. By asking questions to clarify the client’s aims in leaving money to their beneficiaries and then helping them find an estate administrator or trustee and an attorney who can draft a trust that reflects the client’s goals, advisors can assist clients in making sure their legacy is preserved for generations to come!
