Will passing on your wealth be a blessing or a curse to your family? Watching the antics of spoiled rich kids is daily entertainment for much of America's television audience, and most of us are so far removed from their world, we have little empathy for their problems. But imagine dealing with a self-image as reflected by the paparazzi and living under the microscope of a press corps eager to broadcast your every misstep. Unless you keep a low profile, you risk becoming the family laughing stock.

Today's trust fund baby is stereotyped as lazy and decadent, rather than as a future leader of our society. Yet too many deal with intense guilt about their wealth and live unhappy, sometimes tragic lives.

Not every child of privilege lives a wasted life, however. Most grow into high-achieving adults. They are often the children of entrepreneurs who treated philanthropy with the same fervor they approached the development of their businesses. Most have been raised to be responsible people, and many are successful in their own rights. But as future generations become more removed from middle-class values, the work ethic and philanthropic values often become dissipated. There may come a time when an heir's only achievement is based on the sheer luck of being born in the right family.

Unlike the British royal family, the American elite are not typically groomed to find a useful and rewarding way to benefit society. Nor will the family legacy assure them a place in the family's corporation or on the board of directors of the nation's banks. The unaccomplished and inexperienced heir is unlikely to be invited to oversee a charitable foundation's endowment because the family name is no longer a sure ticket to pulling in donations. Today, stockholders expect a high level of competency in corporate leadership, and donors will not tolerate supporting an ineffective head of a public charity. The endorsement of a sports or film star seems to be more clamored for than were the Rockefellers'.

So, how do we provide guidance to our grandchildren or great-grandchildren so that they embrace the hard-work ethic that created the family's wealth and elect to make a major contribution to the business world and society? More and more parents are incorporating their value systems into their estate plans in the hope that their wealth will be used to encourage and reward industriousness, personal development, creativity and philanthropy in future generations.

A Trust With Incentives
Trusts have been used for centuries to preserve family wealth while providing a comfortable standard of living for the trust's beneficiaries. A traditional trust pays all net income to the surviving spouse and, at the spouse's death, distributes each beneficiary's share of the trust principal as he or she reaches a certain age or milestone, such as college graduation. A more flexible version may give the trustees the discretion to retain and manage the trust principal past the normal distribution age, based on the trust beneficiary's needs or situation.

An incentive trust goes one step further. The trustee is instructed to reward those who work hard, invest wisely and accomplish worthy goals. It distributes enough money from the trust to ensure that the beneficiaries are comfortable but not enough to underwrite a lavish lifestyle or to discourage earning a living. Essentially, the trust becomes a family bank, and beneficiaries may apply for and prove the merits of distributions over and above their basic living needs. The trustee might finance a business venture, provide the down payment on a home, match earnings from work, or fund educational or missionary sabbaticals. Trust beneficiaries may be required to submit "grant" proposals or business plans to the trustee to qualify for special distributions.

To encourage a work ethic, the trust could be authorized to match beneficiary employment income up to a limit. To avoid rewarding only the already financially successful heir, a point system might be assigned to give extra credit for homemaking, volunteer work, public service or socially significant careers, such as teaching.

A well-constructed incentive trust will serve as a safety net for legitimate emergencies, medical needs and care for a special needs or disabled beneficiary, including supporting a beneficiary who chooses to play a caretaker's role.

An incentive trust can also have a charitable element. The trustee may be authorized to distribute income in excess of the beneficiaries' needs to charity. Beneficiaries are encouraged to research and make recommendations for grants to charitable organizations.

Because the heirs cannot expect to control the assets, the incentive trust is an effective asset protection tool. An outright inheritance can easily be exhausted due to a lawsuit, overwhelming debt or a bad marriage. With an incentive trust, however, typically no distributions would be made if the assets would end up in the hands of an ex-spouse or creditor. Rather, the trustee would make distributions for the benefit of the beneficiary.

Avoiding Pitfalls
Some critics argue that an incentive trust does more harm than good. Too many restrictions on access to the trust assets not only build resentment among the beneficiaries, but they can make the trust impossible to administer and may leave the trustee exposed to lawsuits.

The starting point to creating an effective trust that will last for generations is to clearly understand what the trust grantor wants to achieve:

What values does the grantor want to promote?

If the grantor was alive to guide future heirs, how would he or she pass down values or support his or her family?

How would the grantor determine who should benefit from the family's wealth?

How should a beneficiary's success or failure at meeting the grantor's goals be measured?

Think through the incentive provisions carefully by playing out worst-case scenarios. The most successful incentive trust should include terms that will encourage positive behavior, rather than discourage negative behavior. Cutting off the beneficiary who is abusing drugs may seem logical, but will it achieve the intended goal? The beneficiary might forgo counseling to avoid detection of his or her problem.

The grantor also has to understand that he or she can't and shouldn't try to control the heirs' choices of religion, spouses or partners, or careers. Not only won't the courts uphold these conditions, but the conditions may not be in the best interest of a particular heir. As my wise daughter once told me, "Mom, I value your advice but the decision is mine. You have done a good job. Now it is time to let go."

Unfortunately, some children will never have the internal motivation to make a significant difference in the world, and no amount of strings attached to a trust will overcome that. Punishing them by withholding money may encourage litigation. If an heir is cut off, he or she may have nothing to lose by contesting the trustee's decision. Instead of expecting future generations to follow in your footsteps, think about how each heir could be encouraged to reach his or her potential, regardless of what that turns out to be.

If the goal is to encourage education or earning a living, how will less gifted children be treated? Should the trustee provide support so that the student can participate in unpaid internships? Will the student have to meet performance standards to continue receiving support? How will the trustee prevent future beneficiaries from manipulating the system? Without some forethought, you might create a professional student who has no incentive to actually go out and get a job.

One way to prevent future generations from wasting their inheritance is to allow them to make small mistakes while they are learning to become financially mature. Consider distributions of principal at various ages so that the trustee can observe how the beneficiary handles money. It is not unusual for young heirs to regret foolish expenditures or decisions. By the time the next distribution of principal is due, they may have learned from their mistakes and be ready to handle greater portions of their inheritance.

A key to a successful incentive trust is an impartial trustee who cannot be controlled by the beneficiaries. Corporate trustees such as banks can detach themselves from emotional blackmailers who might unduly influence a family trustee.

Protecting The Trust For The Future
An incentive trust may last for several generations, and, ideally, the trust document should be written broadly enough to deal with unforeseen circumstances. Recognize that what is appropriate today may not apply tomorrow. One way to deal with the changing family dynamic is to name a trust protector who can change the trust guidelines to meet future or unanticipated needs. A trust protector or
advisor can be a senior family member or family friend who can provide insight about a beneficiary's needs or problems. Alternately, the grantor can provide for a board of several trustees or an advisory council who has the power to amend the trust. Including one trustee elected by the beneficiaries may avoid a future court battle by heirs looking to break the trust.

Lastly, it is important that the grantor communicate his or her personal goals and provide written guidance that the future trustee can rely on. This might be in the form of letter to the trustee that expresses what is important to the grantor and how he or she feels about issues the trustee might encounter. The incentive trust is the grantor's legacy, and it should be a positive message to the next generation that will inspire them to make the best use of the wealth that is given to them.

Tere D'Amato is the director of advanced planning at Commonwealth Financial Network in Waltham, Mass. She can be reached at [email protected].