Jack Cohn had it pretty good. At 20
he was a college student majoring in journalism at a
great Ivy League college.
Tragically, during Jack’s junior
year, his father died.
After the estate was settled, Jack
received a check for almost $650,000.
There are at least two ways this
true story could end up. The first is that Jack decides
to invest wisely and goes on to finish college. The
second is that he decides that college is not as
important as fast cars and lots of parties. (Read the
full article to learn what happened to Jack in real
Most of us would like to think that
our children and grandchildren could handle a sizeable
The truth is that some would be
able to deal with it while others would have great
difficulty. As we all know, money can be both a great
motivator and a great hindrance.
One way to turn money to your
advantage is with an incentive trust.
How does it work?
An incentive trust is a trust which
most often becomes effective when you die, though you
could establish one while living. Assets in the
incentive trust are used by the trustee for the benefit
of your beneficiaries.
The key difference is that rather
than outright distributions, the trust assets are used
to encourage certain types of behavior.
For example, let’s assume that you
believe your children should be rewarded for choosing a
public service career.
This might mean teaching, politics,
mission work or other types of employment that
contribute to the public good but traditionally have not
been considered high paying careers. You could design an
incentive trust that would make distributions to your
heirs if they decide to pursue such careers.
One way to do that would be to pay
them a dollar or two in trust distributions for each
dollar they earn in public service. We have seen
situations where clients have used incentive trusts to
help a child live a drug free lifestyle.
Like anything in life, incentive
trusts have pros and cons.
Here are some of the issues to
Incentive trusts can be used to
motivate good and positive behavior.
They can be used to encourage good
grades in school or completion of certain stages of
education on time.
Incentive trusts can be used to
reward a beneficiary for saving money or for living a
healthy life style.
Many clients have established these
trusts to reward entrepreneurship or stewardship of a
family business. And of course incentive trusts can be
used to encourage philanthropy.
One of the potential concerns
with an incentive trust is the resentment that can be
caused if your heirs feel you are controlling their
behavior from beyond the grave.
Another potential issue is that
children may come to rely on matching trust
distributions and settle for a mediocre job choice
rather than striving to reach ever higher goals.
This type of structure can also be
an easy set up for disappointment if the trust goals for
success are set unrealistically high or for some reason
cannot be met by the beneficiaries.
Despite the potential for
disadvantage, clients continue to establish incentive
trusts. They do this because we take them through a
process that allows them to think creatively about how
to achieve the results they are looking for.
If this idea sounds attractive to
you for your family, here are some things you can start
Keep it flexible.
You never know how your kids or
grandkids will turn out. Sometimes it is the child who
drops out of college who goes on to create Microsoft.
Think about how you could use the
trust to reward constant improvement. One way this can
be done is by having your trustees and your beneficiaries
consult and let your beneficiaries help to establish
their own goals. This can encourage personal and
professional growth in a way that does not require the
your views and values on future generations.
Establish good communication.
One of the biggest problems we see
in this area is the failure to let your children know
why you set up the trust as you did. Failure to
communicate your reasons may be one of the easiest ways to generate
resentment after you are gone. Communication is the best
way to insure that the trust works exactly the way you
want it to.
Finally, consider allowing your
trustees substantial discretion to work with the
beneficiaries so that as times and people change, your
trust can change as well.
Now, back to Jack.
Jack just inherited $650,000
outright. He used the money in the first week for a new
BMW. He went back to school and told everyone what had
happened. As a result, he became the bank for some of
the craziest parties the college had seen in a long
One night, Jack was driving home
from one of these parties and was in a serious car
accident. His face was badly scarred and he suffered a
number of broken bones. Luckily, no one else was hurt.
For Jack, it was a wakeup call. He
called his dad’s lawyer a few days later and made an
The lawyer talked with Jack about
how to put money into trust and set him up with a good
investment counselor. He then told Jack to forget the
money and go back to finish school as his father would
The good news part of this story is
that Jack did go back. He finished with high marks and
now travels the world as a successful photo journalist.
If you think you may need to review
here to have our office call to set up a time to
discuss this with you.
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