Ask any parent about their goals for estate planning, and their first answer will be their wish to provide for their children. This goal is most effectively accomplished through an estate plan where parents can officially and formally express their wishes and intentions for providing for said children. There are  two primary options for leaving an inheritance to a child. The most straightforward is to give it to them in a single lump sum, with no strings attached. But this might not be the best option for some children. Parents may be concerned about the child’s ability to handle the money responsibly, fear it might be split in a child’s future divorce, want to avoid the need for a court-ordered conservatorship to manage the funds if the children are minors, or have some other reason for wanting to set conditions on their inheritance.

Estate planning lets parents exercise control from beyond the grave who receives money, when they receive it, and how they may use it. If parents wish to restrict the flow of inherited money to their child, they can do so through your will or trust. While there are legal limits on conditional gifting, parents are generally free to structure an inheritance the way they would like. However, please note that questions about whether a conditional gift is legally enforceable should be discussed with an estate planning attorney.

Ways to Use Conditional Gifts

When raising children, most parents hope to shape their children’s behaviors, provide them with specific values, and help them become productive members of society. Parents often use a “carrot and stick” approach to get the desired outcomes, incentivizing approved actions with rewards and discouraging unapproved actions with punishments.

An estate plan allows parents to encourage or discourage specific actions before a child receives all or a portion of their inheritance. This type of provision is known as a conditional gift. There are two main types of conditional gifts:

• A condition precedent gift is only given upon a beneficiary meeting a stated requirement (i.e., the “carrot” approach).
• A condition subsequent gift refers to gifts that are given unconditionally but can be later revoked if a specific event transpires (i.e., the “stick” approach).

Condition precedent gifts are frequently tied to age, with money given to beneficiaries upon attaining certain ages (e.g., turning 21) or intervals of time (e.g., disbursements made one, three, and five years after the parent’s death). Usually, such restrictions are put in place because a parent is concerned that their child is not mature enough to manage a large sum of money immediately. Parents may also choose conditions related to certain life events, such as the child graduating college, getting married, buying a home, or starting a business. These gifts can also be stated as guidelines to trustees, by stating that the trust can provide money for such activities as: attending university or graduate school, becoming a homeowner, or even helping to provide startup capital for children looking to start their own business.

There are still other cases where a parent wants to protect a beneficiary from themselves or others. Children who have a history of drug and alcohol abuse might need a combination of the carrot and stick approaches that tie their inheritance to becoming—and staying—sober. There are a variety of reasons why conditional gifts may be included in an estate plan, and the conditions and how best to incorporate them into an estate plan should be discussed with an experienced estate planning attorney.

Not All Conditions Will Hold Up in Court

Although parents can be highly creative and detailed in structuring conditional gifts, their freedom to impose terms is limited.

In general, courts will not uphold conditions that are illegal, uncertain, unreasonable, impossible, or contrary to public policy. Here are some guidelines parents should consider when they create conditions for their children’s inheritances.

• A beneficiary should not be asked to engage in activity that breaks the law or is unconstitutional.
• The conditional gift should be executed in clear and precise language. If there is doubt about what actions need to be taken—or refrained from—for the condition to be satisfied, the court could declare the condition void.
• There must be a chance that the beneficiary can satisfy the condition. In part, a court’s determination on this matter is based on the circumstances of the beneficiary and the context of the gift.
• Conditions that violate public policy are not illegal per se. Instead, they are deemed to harm the public welfare because they are unfair or unreasonable. Historically, many courts have voided on public policy grounds conditions that restrain a person’s right to marry or incentivize divorce.

The way courts interpret a conditional gift based on public policy is not always obvious and can be very fact-specific. It may come down to precedent from past cases and judicial discretion. Some courts, for example, have refused to enforce conditions contingent upon a beneficiary getting divorced, but enforced marriage conditions based on age and marrying within the same religion. Public policy also varies to some degree by state, so a conditional gift ruled invalid in California may be found valid in another state, such as Texas.

Ask an Estate Planning Attorney Questions About Conditional Gifts

Parents and children do not always see eye-to-eye—in life or in death. Each may have questions about conditional gifts in an estate plan that may be best answered by a discussion with an attorney. For parents, as long as the conditions you set are in the best interest of your child, phrased appropriately, and do not contravene public policy or the law, the court should uphold them. On the other hand, if a condition is unclear and left open to interpretation, even the best-meaning condition can lead to a lengthy and costly court proceeding that undermines your intent.

Beneficiaries may question if a condition is legally valid or if they have satisfied it, or take issue with how a trustee is managing the trust for them. Faced with seemingly unreasonable conditions, they may need to raise a legal objection to receive their inheritance.

These issues tend to be personally sensitive and legally complicated, involving not only family dynamics but also state law and court decisions. Whether you are a parent setting a conditional gift or a child receiving one, our estate planning attorneys can help you understand your rights, obligations, and options. Nielsen Law PLLC provides family-focused estate and business planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information, and to learn about our firm, please contact us. We look forward to working with you.