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Paul Merriman, a Seattle-based investment advisor, wanted to leavesome money for his grandson, Aaron. He liked the idea of freeing Aaronfrom financial insecurity but was afraid of spoiling the child, then 5.So Merriman set up a trust using a tax-free gift of $10,000 that hisgrandson can’t touch until he reaches 65.

"It’s not going to make him rich," Merriman told BusinessWeek,but in 60 years the trust could reach $4.9 million in today’s dollarsbased on optimistic compounding of 10 percent per year. "If he wants tobe rich, he can do that on his own."

Many of the 8.9 millionAmerican households with investable assets exceeding $1 million echoMerriman’s sentiments, according to Money. Parents andgrandparents, seeking ways to use their wealth as a positive motivatorfor younger generations — and avoid the "heiress syndrome," or spoilingtheir children — are beginning to turn toward age-restricted andincentive-based trusts.

Age restrictions

Restrictingthe age at which your beneficiaries receive income or principal from atrust you establish is a common way to help children learn to managemoney responsibly. Staggering the distribution of funds over three ormore benchmark ages — for example, 30, 35 and 40 — lets your heirspractice handling a windfall. It also lessens the probability of theirmaking risky investments and losing their entire inheritance.

Incentive trusts

"Theperfect inheritance is enough money so that they feel they can doanything, but not so much that they could do nothing," says WarrenBuffett, the world’s second-richest man, investment guru and founder ofBerkshire Hathaway. Buffett made news earlier in 2006 when he donatedthe bulk of his Berkshire Hathaway shares to the Bill & MelindaGates Foundation — earmarking a more modest inheritance to his children.

Anincentive trust goes beyond age restrictions and rewards heirs forachieving or maintaining a set of predetermined behaviors. Experts saythe originator often wants heirs to establish financial independenceoutside the inheritance. The more frequently rewarded behaviors include:

Pursuing education.You can make monetary distributions from your trust provided that yourheirs graduate from high school, maintain a certain grade-point averageor earn a college degree.

Experts agree it’s important thetrust provisions be attainable. You may prefer to encourage yourchildren in smaller steps by, for example, disbursing funds after eachsuccessful semester or academic year.

To prevent children frombecoming "professional students" who are unmotivated to leave schooland find employment, you can choose to reward only the first bachelor’sdegree, the first master’s degree, and so on.

Finding employment. Youcan set up your incentive trust to reward your heirs for finding andmaintaining gainful employment or working in the family business. Oneway to support a strong work ethic and continued employment is to matchdollars your heirs earn.

As with all trust provisions, youmust carefully think through this type of employment-relatedrestriction. If you intend to treat all your children equally but onegoes into teaching and another finance, their salaries and, therefore,your matching contributions, may not be equal. And if this type ofprovision is inflexible, an heir who’s a stay-at-home parent — or whobecomes disabled and is unable to work — may regard it as punishing.

Joining the family business or starting companies.You can structure a trust to encourage your children to join the familybusiness. One method is to base distributions on the heir’s years ofservice to the family business. Or, you can encourage children to starttheir own companies by providing seed money or matching their earlyrevenues.

Buying a home, marrying and having children.If your personal values include owning a home, maintaining a marriageand having children, you can encourage these values in your heirs bymatching down payments on homes or linking anniversaries and births tofinancial distributions.

Living a healthy lifestyle. Ifyou fear a financial windfall will lead your children to unhealthylifestyles involving drugs, alcohol or gambling, you can mandatefinancial distributions be contingent upon their avoiding suchdestructive behavior. If you are aware of an heir’s existing addiction,you can make distributions contingent on rehabilitation.

Contributing to charity.To further their appreciation for volunteerism and communityinvolvement, you can choose to create financial incentives for yourchildren to serve the community. Methods can include distributing basedon volunteer commitments, matching charitable donations or creating aprivate foundation for your heirs to administer.

Special-needs trust

Aslightly different type of trust — but one experts say they’re seeingmore of these days — is a special- or supplemental-needs trust. Such atrust provides benefits for physically or mentally disabled heirswithout jeopardizing any public benefits they’re entitled to receive.Many of the benefits available through the public sector become veryexpensive or practically unavailable outside the public system.

Thistype of trust can provide for physical therapy, medical treatment,education, travel, entertainment, companionship, clothing, furnishings,telephone and cable service, and, in some circumstances, shelter. Cashdistributions are rarely permitted.

As with all trusts, you’llneed an attorney, perhaps one who specializes in this type of law. It’salso helpful to include your financial professional from the beginningin order to maximize your tax benefits.

Keys to success

Following are three additional keys to successfully implementing your trust:

Choose your trustee wisely. Jeffrey Condon, co-author with his father, Gerald Condon, of Beyond the Grave: The Right Way and the Wrong Way of Leaving Money to Your Children (and Others),recommends hiring a trustee to oversee the funds. If one of your familymembers isn’t willing or able to serve as an unbiased trustee, aprofessional — such as an accountant or lawyer — could be a betterchoice. As Jeffrey Condon notes, a professional may be less likely toyield to frequent requests for additional disbursements.

Communicate with your heirs.To minimize resentment on the part of your heirs, discuss therestrictions you put in place. Help your children understand yourintentions, recognize the values that drove your decisions, and letthem know what goals you set for them. Knowing your plans will helpthem map out their own financial lives.

Leave a safety net.When you’re structuring your trust, experts recommend leaving a safetynet for your children so that even if they fail to achieve some of theestablished goals, they’ll still be able to support their families.

Thereare no guarantees that everything will go according to plan and yourheirs will meet each of your goals for them. However, if you create atrust that reflects your values and is flexible enough to adapt tounforeseen health and welfare circumstances, you have a greatopportunity to pass on life lessons to the next generation.