Trusts can let parents cajole from the grave


Bernie and April Bedard preach the importance of a college education to their children and, thanks to estate planning, will be able to one day continue to influence from the grave.

The suburban Detroit parents set up a trust to disperse money after they die to their four children, but added incentives for the two youngest. The sons, 20 and 16, will get an extra $20,000 if they obtain a bachelor's degree and $30,000 for a master's.

"I love my children, regardless of what they do," said Bernie Bedard, 54, who attended night school for seven years to earn a college degree and worked his way up the corporate ladder at what is now DaimlerChrysler. "If they become a carpenter, that's fine with me. But there is nothing wrong with a carpenter having at least a bachelor's degree."

The Bedards are among the latest parents to use financial carrots in trusts to encourage certain behavior in their children.

The concept isn't new. Parents for decades have tried to motivate or control children from the grave through clauses in trusts. But estate experts say there's now more interest in so-called incentive trusts because of the immense wealth being created in today's strong economy and stock market.

Many of those adding incentives in trusts are new to wealth themselves, such as dot-com millionaires, who worry about the effect of a substantial inheritance on young children and their values, experts said.

Often in incentive trusts, beneficiaries receive extra cash or an earlier access to trust money if they meet certain goals. A common goal is a college education. But lawyers said parents tie up money with other strings, such as requiring children to remain drug-free, be a stay-at-home parent, work in the family business or donate to charity.

"Parents are concerned if they protect a child for his or her lifetime, the child will not have any incentive to go out and make a living and produce for society," said Dean Bouland, a Baltimore lawyer. "Do you want somebody living off what someone else has done, or do you want your youngsters to contribute something to society?"

While such trusts may be catching on, not everyone is a fan.

"Most estate planners aren't wild about engineering someone's life," said Michael Hodes, a Towson lawyer who draws up incentive trusts but advises against elaborate restrictions. "At what point do we let go?"

Cristin Lambros, a Baltimore County lawyer, advised: "Give them the money at 35 and let them become the person they are going to be. You can only control them for a certain period of time and even then, they may say 'Forget the money, I'd rather live this way.'"

But critics acknowledge that incentive trusts can be helpful when children are spendthrifts or substance abusers.

Incentive trusts can be set up in a variety of ways. Parents tend to set the terms when a child is young but give themselves flexibility to revise conditions until both parents die, Hodes said. Usually, the trust for the children is funded at the time of both parents' deaths, he said.

A trustee is appointed to make sure the child meets the trust's conditions before receiving any money. If goals aren't met, the money may go to charity or remain in the trust to be parceled out to children as needed, Hodes said.

The best incentive trusts give the trustee flexibility in making distributions to children, experts said. Without flexibility, even the best intentions can backfire.

For instance, parents may want to reward a child who obtains a college degree, but fail to consider what happens if the child is injured and can't attend school, said Bill McCarthy, an executive vice president with Allfirst Trust Co. in Baltimore. With flexibility, the trustee could use the money to help the child, likely what the parents would have wanted anyway, rather than be handcuffed by an education requirement, he said.

Parents must also be careful that goals can stand the test of time, because what may be a good idea in 2000, may be impractical and ridiculously outdated in 2030.

"Think through incentives carefully. You want it to be an incentive, not a disincentive," said Joe Saul-Sehy, an American Express financial adviser in Auburn Hills, Mich.

It helps to sit down with the trustee to explain your hopes for your beneficiaries, experts say, and to periodically review the goals to make sure they are still appropriate.

Experts offer other dos and don'ts:Do be specific in goals, but not so narrow or restrictive that your heir has little hope of achieving them or just gives up.

The Bedards, for example, knew that they could have added all sorts of goals in the trust for their children, but limited the incentive to education. "We don't want to defeat it. We want to encourage it," said April Bedard.Don't set goals that are extremely difficult or impossible for the trustee to confirm, McCarthy said. Determining whether a child achieves a college degree is easy; discovering whether an adult child is a faithful spouse isn't.

Unless you value money most, don't tie how much your children receive solely to their income.

"It's saying: If you go to work as an investment banker you deserve more money than if you teach autistic children," said Mari Adam, a financial planner in Boca Raton, Fla.

It also rewards a child in the work force over one that's a stay-at-home parent, although both endeavors have value, experts said.Don't make it easy for beneficiaries to switch trustees, thereby allowing them to shop around for the one most likely to rule in their favor, said Mary Frances Dean, a Pittsburgh lawyer.

If you want to provide the ability to remove a trustee but don't want the replacement to be your child's pal, require that the new trustee be an independent brokerage or financial institution with, say, $500 million in assets, Dean suggested.Do talk to the beneficiaries and explain the incentives and why you created them. This may reduce any resentment a child may have over being under parental control. "The worst kind of an agreement is one that's a surprise to somebody," Adam said.

Do you have a personal finance issue of general interest that you would like to see addressed in this column? Contact Eileen Ambrose at 410-332-6984 or by e-mail at

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