Most people want to leave assets to at least their closest loved ones. However, not all loved ones may be prepared to handle them. That’s why a conditional trust is commonly used as an estate planning tool.
A conditional trust (sometimes referred to as a spendthrift trust) is a way of exerting some control over how a beneficiary receives and/or uses their inheritance. For example, a grandparent may stipulate that a young adult grandchild can only receive a certain portion of the trust assets at a time – maybe a designated amount per year. They may direct that they not receive anything until they turn a certain age – like 30 or even older.
They can be used as an incentive for positive actions
These trusts are also sometimes called incentive trusts because some people use them to help incentivize loved ones to continue their education or start a business. The person who establishes the trust (the grantor) can require that the assets be used only for certain purposes.
Sometimes, they’re tied to the beneficiary taking steps to “clean up their act.” A beneficiary may have to get treatment for addiction or alcoholism and remain clean and sober before they can receive any trust assets.
What kind of conditions are prohibited?
Unfortunately, some grantors want to tie the inheritance to other things that typically are considered prohibited conditions and likely won’t hold up in court if they’re challenged. This is sometimes called “dead hand control.”
For example, the conditions of a trust can’t require someone to get married or divorced, put any conditions on whom they can marry or prohibit them from marrying at all. They can’t require the beneficiary to adopt a specific religion or political affiliation.
A trust also can’t include conditions that involve criminal or fraudulent activity, like hiding assets owned by the grantor or destroying evidence of such activity.
If carefully drafted and placed in the hands of a responsible trustee, a conditional trust can benefit a loved one who might misuse a more direct inheritance – especially if some kind of personalized direction is included to the beneficiary explaining the reasons for the conditions and the grantor’s hopes and goals for them.
If prohibited conditions are included, however, the entire trust could potentially be ruled invalid. That can be prevented with sound estate planning guidance.