What to know about incentives and trusts

The Gates children won't inherit their parents' billions. Apparently, each child will receive ten million dollars and the remainder of the estate goes to charity. Warren Buffett, Michael Bloomberg, George Lucas, Sting, Richard Branson and others are following a similar strategy.

Like many affluent parents, they have concerns about the impact a significant inheritance could have on their children. According to Buffett, it's wise to leave your children enough money so that they feel they can do anything, but not so much that they could do nothing.

If you're not ready to give the bulk of your estate to charity but you are concerned about the potential impact of inherited wealth on your children, there are other options. They include timing the cash distributions, adding general statements of intent to your estate plan, establishing incentive provisions in your trust — and even creating an incentive trust.

Most inheritances come with restrictions of one sort or another. In fact, it's not uncommon to include provisions in an estate plan that distribute an inheritance — often the principal or income from a trust — based on the age of the beneficiary. For example, distributing a third at age 30, another third at 35 and the remaining third at 40.

Of course, such an approach assumes that your beneficiary will be in a position to make better life decisions with more maturity. It also assumes he or she will be at least partially self-supporting before age 30.

Other than disbursing the funds in installments, or perhaps in addition to doing so, what can you do to create incentives for your children or other beneficiaries?

General statements of intent

Often estate plans and trust agreements include language describing the values of the benefactor or grantor.

For example, We want to ensure that our children and grandchildren receive a college education.

Or, We built our business from nothing through hard work, and we want our children and grandchildren to appreciate the importance of work in their lives. It is our intent that they shall not depend on the trust for support and maintenance if they are mentally and physically capable of earning a living