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Trusts can encourage productivity in children

Can you trust your kids when you're not watching them? My kids are very good -- most of the time. Last weekend, however, Carolyn and I went to a movie, and left our kids with a babysitter. I wasn't concerned about Sarah and Michael, but I wasn't sure about Winston. To avoid a major catastrophe, I thought a little bribe might help. "Winston, if you behave when we're out, I'll give you a loonie in the morning." He liked that idea.

Now, if Winston had been really good, he would've been all over me first thing in the morning to give him the loonie. Instead, I heard not a peep from him.

At breakfast I posed the question: "So, Winston. Did you behave last night? Should I give you a loonie?"

He just looked down and replied in a sullen voice: "You can gimme a quarter instead, Dad."

The behaviour of your kids when you're not around may also be an issue after your death. In my last article, I wrote about testamentary incentive trusts as a means to reward children for certain behaviour after your death. Today, I want to finish that topic.

The goal

You might recall that a testamentary incentive trust is simply a trust created after your death, through your will, that permits distributions of money to your beneficiaries -- which I'll assume are your kids, but could be anybody -- when they engage in certain behaviour, or avoid certain behaviour.

Now, an incentive trust may or may not work as planned, depending on how your kids are motivated. Some kids may perceive you as simply trying to control their actions from beyond the grave, which could cause problems, some of which I spoke about last time.

In most cases, the objective of parents who set up an incentive trust at the time of death is simply to encourage their kids to be productive, responsible, citizens -- and not to control the lives of the children. This being the case, a good alternative to an incentive trust is a "productivity trust."

The objective of a productivity trust is to encourage the children to take control over their own lives in a manner that will result in them becoming productive, responsible citizens. In his book Self-efficacy: The Exercise of Control, researcher Albert Bandura found that an individual's perception of his ability to control outcomes in his life is a better predictor of success than actual ability, preparation, achievement and level of interest.

The bottom line? Your children need to feel as though they have control over their own lives. The productivity trust can provide this, but still manages to control distributions of funds from the trust to ensure your purposes are met.

The trust

Let me paint a clearer picture of what this productivity trust might look like. I credit this picture to lawyer, Marjorie Stephens, of Dallas, who is a leading drafter of these trusts (check out Ms. Stephens' paper "Incentive Trusts: Considerations, Uses and Alternatives" published in the ACTEC Journal, Summer 2003;

The productivity trust would be set up upon your death, by your will. The trust would clearly identify, in a statement of purpose, your purpose in setting up the trust. This purpose will be quite broad, and will never change, as long as the trust exists. This purpose should be shared with your beneficiaries while you're alive.

Your purpose for the trust, for example, could be to assist each of the beneficiaries in their pursuit to discover, develop, and utilize their unique talents and to distribute the trust assets in a manner that will motivate and guide the beneficiaries in utilizing their unique talents to live productive, contributing lives.

Next, the trust will contain guidelines. These guidelines are a very specific discussion of how you, as a parent, envision the trust operating, including the situations in which distributions would or would not be made from the trust.

The key is that, in a productivity trust, the children will have the right, as beneficiaries, to change, expand, or refine the guidelines as their circumstances change, keeping in mind that the guidelines must always aim to carry out your purpose for the trust. Ms. Stephens suggests that a trust committee be established, which would include a beneficiary to oversee any changes.

In the end, two things are accomplished: Your purpose to assist your children to lead productive lives will be carried out, and your children will feel as though they have some control in the process, which can avoid some of the problems associated with trying to control your kids from the grave.

Tim Cestnick, FCA, CFP, TE,P is author of Winning the Tax Game 2004, and The Tax Freedom Zone. He is managing director, national tax services, at AIC Ltd.

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