Some people are reluctant to use trusts in their estate planning. You might think that leaving money in trust will make “trust fund babies” of your children or grandchildren. You may fear they’ll become spoiled brats who do nothing but spend income they haven’t earned. They could spend or invest foolishly.
A trust actually can prevent your descendants from following such an undesirable lifestyle. Distributions can be set at modest amounts or left to the discretion of the trustee, who’ll manage the trust assets.
If you do leave money in trust, you should avoid the common practice of providing for distributions at, say, ages 25 and 30. At those ages, most people are best-served by finishing their education and establishing their careers. Dropping money into their laps at that age might reduce their motivation to pursue a meaningful career.
One option is the so-called “incentive” trusts. They offer rewards to trust beneficiaries who accomplish certain goals. With such a trust, beneficiaries might receive particular amounts for getting higher education degrees, attaining certain levels of earned income, serving in the community, etc. For example, you might state that the trustee will distribute to each of your grandchildren a certain percentage (say, 25 percent) of earnings each year, up to a certain amount.
Another approach is to leave such distributions to the discretion of the trustee. The trust might indicate what types of activities will be rewarded, then allow the trustee to make appropriate distributions. For this type of arrangement to succeed, it is especially important that you choose a highly-qualified trustee.
The trustee (perhaps a relative, a friend, or a professional advisor) must be able to empathize with your beneficiaries yet make prudent decisions about distributions. Moreover, you should include a plan for trustee succession, in case your first choice becomes unable or unwilling to serve.