Lump Sums, Incentives and Second Chances: How to Structure Trust Fund Distributions

Only one day after the unexpected death of Robin Williams last week, the celebrity news website TMZ reported on details of a trust that the actor apparently had created in 2009. Representatives for Williams’ estate later clarified that the documents are no longer valid. But the purported content of that plan highlights some options for passing on wealth to the next generation. TMZ wrote that Williams had stipulated that the assets in the trust should be paid incrementally; each child should receive one third of his or her share at 21, another at 25 and the final one at 30. The provisions did not depend on Williams’ death.

The strategy of transferring substantial assets via a trust and in tranches is common, and for good reasons. Keeping the funds in a trust can have tax advantages, and it ensures that they stay out of reach for potential creditors, and safe and secure in divorce situations. The incremental distribution of assets allows for second and third chances. If the beneficiary squanders the first installment, he has the opportunity to mature before receiving the next one.

Williams’ old plan specified ages at which his children should receive portions of their trust money. It mandated that the payments should begin with adulthood. Whether 21 is a good age for someone to start inheriting is certainly debatable — looking back, I am not sure that I would have dealt with a monetary windfall responsibly while I was still an undergraduate — but I am sure there are young people who can handle wealth well. Another way of doling out an inheritance incrementally would be to ensure a steady trickle of funds by ordering payments to be made every year or every two years.

A modern form of tying distributions to milestones is to structure “incentive provisions” into a trust. These kinds of stipulations basically reward the beneficiaries of a trust for good behavior and punish them for bad. You can mandate that your son will receive part of the funds when he graduates from college or that you will disinherit your daughter if she uses drugs or takes up gambling. In a way, you are in control. One caveat though: Incentive trusts can make life hard for your trustee, especially if you die early and are not around to advise him. He will have to determine whether your heir is living up to the standards you laid down in the trust or not.

by Kevin J. Moore

Kevin Moore, Founder of Kevin J. Moore & Associates, is focused in the areas of estate planning, trusts and probate services with additional expertise in both domestic and international business transactions and tax planning and tax controversy representation for individuals and companies.