Many of America's wealthy families, and even many families who have accumulated more modest wealth, are concerned about passing their assets on to children who may not know how to handle an inheritance financially or emotionally. Many parents are turning to what's loosely called "incentive trusts," a controversial style of trust intended to promote certain beneficiary behavior by attaching strings to the trust distributions.

Of course, trusts have long come with "strings attached." One of the most common is an age restriction. A child might not receive income or principal from the trust until reaching a certain age, such as 25, 30, 35, or even later. This allows the beneficiary to mature, an 18- or 21-year old is less likely to handle the money as well as the person would at 25 or 30, goes the theory. Another approach is to stagger distributions over benchmark ages, to give them the opportunity to learn how to manage money well.

Today's incentive trusts, however, often go beyond age restrictions. They are intended to motivate certain positive behavior by the beneficiary. For example, the wealthy often worry that their children have developed a poor work ethic, having grown up with wealth. Accordingly, a trust might provide incentives to work by distributing money only if the beneficiary earns money on their own. If the beneficiary earns a certain level of pay, the trust might pay out a matching amount for each dollar earned by the beneficiary. Some match a higher amount the more money the beneficiary makes.

An incentive trust might pay income or principal, or perhaps pay a larger amount or pay it sooner, if the beneficiary graduates from college, maintains a certain grade point average, does work for the family charitable foundation, takes over the family business or donates a certain amount to charity. Some trusts won't pay out money unless the beneficiary stays free of drugs, alcohol or tobacco.

In fact, many trusts can be as restrictive as you want them to be as long as the restrictions are not illegal. For example, you can't specify that the beneficiary must marry someone of the same race or that they must divorce their current spouse, though some advisors assert that it is possible to restrict the trust should the beneficiary marry someone in a different faith.

The deeper issue is whether such restrictions is a good idea. Critics complain that "ruling from the grave" often creates resentment, even hatred. Children resent being parented when they are in adulthood, and incentive trusts are merely the parents' effort to instill behavior and teach values they failed to instill when the child was growing up. Some say such incentives usually don't work, anyway. If the child is immature at 25, why assume the child will be mature at 40 when distributions begin? And there can be the problem of restrictions that are vague, such as defining certain ethical behavior.

Proponents argue that it is naïve to assume that a trust with no restrictions doesn't also have an impact on the beneficiary. It's well known that inheriting large amounts of money can create deep emotional problems for the beneficiary. Why not set up the trust to encourage positive behavior and positive inheritance experiences? Proponents also believe that there is nothing wrong with trying to instill values in your children, even if they are adults. A key, they say, is to discuss these restrictions with the beneficiaries before the trust creator dies. This not only helps minimize misunderstandings, but also helps them plan their own financial life.

You can create a new incentive trust, or add incentives to an existing trust. Many kinds of trust can be used as an incentive trust: an insurance trust, living trust, credit shelter trust, dynasty trust, a generation skipping trust or a Crummey minor trust to name only a few. Just be sure you have the trust drawn up carefully, and that you carefully pick the trustee or successor trustee (in the event it must be administered following your death). These trusts usually should give the trustee some flexibility for unforeseen circumstances. Incentive trusts also often provide enough "safety net" so the beneficiary doesn't become destitute.

 This article was produced by the Consumer Affairs Dept. of The Financial Planning Association and provided to you courtesy of Nigel B. Taylor, CFP, Santa Monica, California. If you have any questions or concerns regarding this, or any other financial topic and are a resident of Southern California, please call me at 1-800-444-2237 (California residents only please), or click on the "MORE INFO" button to arrange for a free initial consultation in the comfort of your home or office.