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I’ve drowned my share of worms fishing with my dad.  Not to mention marshmallows, and power bait.  Parenting is about passing on valuable life lessons, like “measure twice, cut once”.  The great thing about trusts is that you can use them to pass on life lessons as well.  This post is about passing on important financial skills through the structure of the trust benefits.

There are at least three different ways benefits can be paid out with the goal of passing on financial skills: 1) directly, after reaching a certain age, 2) with a Work-Incentive Trust, or 3) with a Financial Skills Trust.

Reach A Certain Age

This is the simplest and most popular option, where the parent or grandparent chooses to have the trust benefits paid out when the beneficiary reaches a certain age.  The hope is that by choosing an age older than 18 (the age you become a legal adult) the beneficiary will have learned some important life lessons, and achieved something, for example graduating from college.  There are no actual metrics in place though for enforcement, other than the simple matter of reaching the target age.  This option has the benefit of simplicity, but sacrifices accountability to achieve that simplicity.

Work Incentive Trust

A “work incentive trust” is centered on rewarding income and savings.  Better work-incentive trusts have the trustee making distributions based on whether the beneficiary is employed to his “potential.”  A simpler approach has the trustee matching distributions to the actual income.  The “potential” approach is fairer as it allows the trustee to reward the hard-working law enforcement officer and the higher earning financial professional equally.  The trick is that the trustee has to make a very subjective judgment call on whether the beneficiary is living up to his or her “potential.”

Financial Skills Trust

The “financial skills trust” focuses on giving the trustee an objective (rather than subjective) test for making distributions.  The tests can include, not spending more than you make, planning for, and creating income reserves, avoiding debt, the ability to account for your resources, the ability to manage money as an asset (investing), and maintaining employment.  With this set of criteria, the trustee has a measurable standard to which to hold the beneficiaries, making their job a little less discretionary, and giving the beneficiary a little more freedom to pursue their interests.

The great thing about creating trusts, is that no one solution fits every family and circumstance.  There are many options to evaluate what will best meet your goals, and your family’s needs.