Estate planning attorneys occasionally draw the strong-willed client who wants to leave money to an heir – but only if the kid sobers up, quits getting in trouble with the law, gets a job, stops living beyond his means, or changes behavior in some other way.
“I do try to talk clients out of trying to put in a bunch of restrictions,” said Lewis Wagner LLP partner Jarrell Hammond. “They’re hard to write, and they’re hard to include in the document so that they are enforceable.”
And when litigation arises in situations like these, lawyers say it is almost always the heir the condition was imposed upon who sues. Nevertheless, trust and estate lawyers say clients now and then insist on using trusts and wills to offer carrots or sticks to try to get kids, grandkids, nephews, nieces or other heirs to shape up.
Attorney Tracy Troyer of Troyer & Good P.C. in Fort Wayne has drafted conditional trusts with all sorts of provisions encouraging certain behaviors, but she said it’s usually not the best idea. “My general preference is to give the trustee as much discretion as possible instead of getting very specific about when you can and can’t make a distribution,” she said.
Troyer estimated about 10 to 20 percent of her clients want some kind of condition placed on inheritance distributions. She and other attorneys said they’ve fashioned trusts that condition distributions, for instance, on the heir providing clean drug tests over a certain period, proof of annual earned income, or transcripts reflecting a certain grade-point average.
Kreig DeVault LLP partner Rodney Retzner said clients sometimes want to exercise what’s called “dead-hand control” of trust distributions. When they do, it’s imperative that the language controlling those distributions be as specific as possible. As an example, he said making a distribution contingent on doing well in school should specify a minimum grade-point average maintained over a definite period of semesters.
Retzner said clients who want these provisions believe, “There are things you have to do to protect children from themselves.”
Citing the need for detailed specificity, he said incentive conditions in a trust “should be very much like the wiring diagram for a nuclear submarine. … Typically, litigation doesn’t have much to do with the document, it has to do with people not getting along before mom and dad dying. … When the fighting is about the documents, it’s typically because the document itself is unclear.”
Frost Brown Todd LLC member Jeff Dible said there are numerous tools that can be used in an effort to address problems from personal irresponsibility to criminal behavior. However, he said, “None of the frequently used techniques are guaranteed to actually motivate the child to change his or her behavior for the better in a lasting way.”
Trusts with protective provisions and discretionary spendthrift trusts sometimes provide for an heir’s living expenses under the IRS-recognized health, education, maintenance and support standard, but leave other distributions to a trustee’s discretion.
That discretion can be a source of conflict if conditions for distribution aren’t clear. “These days, many well-known national and regional banks and trust companies will refuse to serve as the trustee of a discretionary spendthrift trust or incentive trust when a ‘child with problems’ is a beneficiary because of the difficulty of the decisions that need to be made and the need to document the decision process, in order to minimize the bank or trust company’s liability exposure,” Dible said.
Bose McKinney & Evans LLP partner J. Gregory Shelley has been on both sides. Before he started drafting estate plans, he worked several years out of law school as a trust officer at a financial institution. He said trust officers frequently resign in frustration after trying to administer plans that condition distributions on a set of behaviors.
“My two cents is, none of them work,” Shelley said of trust conditions. “In my opinion, there have been so many behavioral studies, and these behavioral studies show financial incentives are not effective in encouraging certain types of behaviors.”
Conditions in trusts put trustees in the crosshairs of litigation when an heir believes distributions are wrongly withheld. That’s led some trustees to insist on trust advisers – usually a family member familiar with the situation – to serve as an intermediary, giving the trustees some room to exercise discretion within the four corners of the trust document.
But this, too, can be a recipe for trouble, especially when the adviser is a sibling or other close relative. “Sometimes the best intentions only create more animosity or dysfunction in the family,” Hammond said. “Trying to put those things back together after a fracture, my experience is, you never do. … Whatever honked off someone when they were 10 years old about their siblings, it just all comes back to roost once the parents leave.”
While he tries to discourage clients from using behavioral conditions, Shelley said some won’t be dissuaded. The result can be even worse behavior from an heir. “We’ve seen altered grade transcripts, we’ve seen altered tax returns, forged documents” provided in an effort to meet trust conditions, he said.
An approach Shelley said has been helpful in some cases is creating a discretionary trust that includes a memorandum or letter of the giver’s wishes rather than strict conditions or benchmarks. While not legally enforceable, such a document or mission statement provides a trustee and an heir an idea of the giver’s desires.
Some conditions can be beneficial. Rewards such as stipends for graduating college or meeting some other goal are more effective than penalties or terms that may be seen as punitive. One attorney said he’d written trust conditions stipulating a distribution was contingent on a parent staying out of the workforce to be a stay-at-home mom or dad. Another said a client once gifted money on the condition that it’s used for international travel.
Retzner enjoys drafting plans where clients include conditions that reinforce positive behavior. “My favorite part of estate planning is when clients involve charity,” he said.
He’s had clients, for instance, who required that heirs give 10 percent of their distributions to charity. Others created family foundations where the children decided how best to spread some of their distributions for a good cause. “They get shaped by that, and that’s very helpful in raising that child,” Retzner said.
Troyer has had clients peg their distributions to match a child’s income reported on W-2 forms. But she said she talks with clients in those situations about whether doing so places more value on total income than on earnings from a job that may be more meaningful to the child but may not pay as well, such as teaching.
Clients concerned that their child or heir may burn through an inheritance have a few options besides incentives or conditions. A trust may be drafted to provide annual distributions, or pay out a percentage of the inheritance at a certain age followed by later partial distributions.
Troyer had one client who was worried the kids weren’t saving enough. The client designed the trust distributions to be made when the kids turned 65 so the trust would serve as their retirement account.
“It’s not a bad idea,” she said. “She’s the only client I’ve ever done that for, but it’s something she wanted to do, and we talked through the pros and cons, and it made sense for her family.”•