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.
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.
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