Recent Developments

Summary:

So Junior wants to spend his inheritance faster than
you can earn it and has his eye on a new red Lamborghini. What can you do to
assure that Junior won’t burn through his inheritance faster than a meteor
hitting the Earth’s atmosphere (for you science buffs re-entry temperatures can
reach as high as 3,000 degrees F). Here’s a checklist of things you can do:

¶ Buy
an annuity:

Mandate that your
executor take some portion of Junior’s inheritance and buy a non-cancellable
annuity.  If Junior cannot cancel
or accelerate the annuity, the principal should remain relatively secure. If
Junior is young, consider an annuity that will pay Junior an inflation adjusted
amount every quarter for the rest of his life. This will assure Junior has
enough money to buy chips and beer forever.

¶ Trust:

Put all of Junior’s inheritance in a trust and
name a tough trustee who will be able to withstand Junior’s whining and begging
so that the funds can be used judiciously over Junior’s life. Institutional
trustees, use to dealing with trust fund babies, and fixed hours (they don’t
have to listen to Juniors whining for money on weekends like Uncle Harry would
have to), are a great choice. Delineate in the trust agreement specific items
the trustee should pay for (tuition, technical school, etc.), and specific
things the trustee should not pay for (bling, private yachts, etc.).

¶ Incentive
Trust:

Make distributions from
Junior’s trust in part based on Junior’s performance and conduct. If Junior
earns $50,000, let the trust match it plus pay certain other expenses. If
Junior earns nothing limit the trust to cover just basic needs and expenses.
These trusts have been touted as a great technique to motivate underachieving
heirs. In reality, these are not simple documents. How is “income” to be
defined? If Junior joins the Peace Corp. or something equivalent he might earn
little while accomplishing a lot. You may want a greater incentive for such
altruistic conduct. The problem with incentive trusts is that it is difficult,
if not impossible, to address the myriad of circumstances that might arise. It
might be just as effective, perhaps more so, to have a discretionary trust and
give the trustee the flexibility to react to the beneficiary’s circumstances,
rather than endeavoring to embody the range of behaviors in an incentive
formula.