A parent, grandparent or other loved one has left you a considerable amount of money or other assets in a trust. You learn that it’s what’s called a “conditional” or “incentive” trust.
These are not uncommon. For example, a parent will often establish a trust for a young adult child (or one who’s not so young any longer) stipulating that the trustee can only disburse a certain amount or percentage of the trust assets each year or that the beneficiary can’t begin to receive disbursements until they reach a specific age.
They may require that the funds only be used for specific goals, like attending college or learning a trade. The beneficiary may have to first remain clean and sober for a specified time if that’s been an issue that could cause them to misspend their inheritance and potentially hurt or kill them.
If the trust’s grantor didn’t discuss these conditions with the beneficiary, they can be surprising and frustrating. Typically, however, these types of conditions are valid because they’re for the beneficiary’s well-being.
Conditions considered “contrary to public policy”
Unfortunately, some people try to use conditional trusts to require a beneficiary to comply with their beliefs about how they should live their life and place conditions on their most personal decisions. This is sometimes called “dead-hand control.”
These conditions include things like requiring a beneficiary to get married (or even divorced). They may state that a beneficiary cannot marry someone of the same sex or of a different race or religion. They may require them to convert to or remain in a particular religion. Conditions like these are typically ruled invalid if challenged because they’re considered to be “contrary to public policy.”
A grantor may even require a beneficiary to do something illegal or fraudulent – like destroy evidence of a crime or hide assets that are owed to the IRS or someone else. Conditions like this are illegal.
None of the conditions noted above are typically enforceable because they aren’t legal. The entire trust may be ruled invalid. A person who leaves a trust with conditions like these obviously did so without legal guidance.
If you’re the beneficiary or even the trustee of a trust you believe to have prohibited conditions, don’t make that mistake. It’s best to seek sound advice as soon as possible.