This column is Part Two of our answer last week to a husband and wife who wanted advice on whether to disinherit their problem child totally, or, alternatively, set up a trust for him. The son had a long-standing drug and alcohol problem and had been in numerous scrapes with the law over a period of more than 20 years.
Admit it or not, many families are faced with one or more difficult children whose problems run the gamut from substance abuse to criminal activity to laziness to an inability to handle money. Other reasons for parents wanting to restrict financial distributions to children can include protection of a child from claims that may be made as a result of an imprudent marriage and subsequent divorce, or claims made by creditors.
Faced with these tribulations, parents must often decide whether to either 1) disinherit the child, which is an extreme decision at one end of the spectrum, or 2) restrict the flow of inherited money to that child to protect him from himself through the use of appropriately drafted trusts. If trusts are used, it is probably wise to include incentive provisions by which, upon reaching established goals, the child will be entitled to receive principal distributions commensurate with his/her positive performance.
Because disinheritance gives a child no incentive but to continue on a downward spiraling path and to contest the will or trust, some parents opt for creative incentives that they hope will encourage good behavior and discourage bad conduct. For example, you may consider economic incentives to encourage your child to become gainfully employed by providing for a dollar-for-dollar match from the trust for each gross dollar of salary earned over $25,000 annually. Or, you could reward a child with financial benefits in exchange for a certain grade point averages in school.
Other types of economic incentives could require the beneficiary 1) to submit to random and frequent drug tests through a laboratory chosen by the trustee with provisions that refusal to test or testing positive would mean termination of all distributions until the beneficiary tested negatively on three future drug tests; 2) to report to the trustee any traffic or other violations of the law, which would result in termination of benefits for a specific period of time; and 3) to test negatively for drugs and be employed full time for a year before any distribution of money would be made. The trust also could include a provision that should the beneficiary's conduct result in three cessations of distributions, the remaining principal and interest in that trust would be distributed to a charity or another beneficiary.
According the experts, however, the jury is still out on whether the use of incentive trusts results in a beneficiary's behavioral modification, especially for those who are have alcohol and drug problems. Still, it may be worth the effort. You have nothing to lose, particularly if these are long-standing problems.
Taking the NextStep: While planning for the child who marches to a different drummer or drives you up the wall with his/her antics is difficult, the process is made even more difficult when the real motive behind the planning process is the desire of the parents to remain in control of their dollars from the grave.
First Published: October 22, 2006, 4:00 a.m.