Thinking about incentive trusts

In a recent Trusts & Estates article, “The Ultimiate in Dead Hand Control – Incentive Trusts,” attorney Charles Redd considers “incentive trusts” and their potential uses.  According to Mr. Redd,

“an incentive trust is a special type of trust, limited in scope only by the imagination of the estate planner and the client, which is designed to address the client’s apprehensions that large inheritances and trust distributions could harm, if not ruin, his children’s lives. The terms of an incentive trust are carefully constructed to confer on the trustee the necessary discretion to make distributions to or for the benefit of the trust’s beneficiary at times and under circumstances in which such distributions would encourage or reward specific behaviors and activities that the trust’s settlor, with the help of the estate planner, has defined as positive and to withhold such distributions when they would enable or encourage the beneficiaries to engage in certain defined negative or destructive behaviors or activities.”

The article discusses potential uses of such trusts, but we wanted to provide a quick list for consideration.

To encourage positive behaviors, one might consider these uses:
– Money for particular schooling or levels of schooling, such as college or post-graduate schooling;
– Bonuses payable at milestones, such as graduation, marriage (only the first!);
– Incentives for a child to attend a particular college or university;
– Bonuses payable according to a beneficiary’s earned income;
– Incentives payable to beneficiaries who undertake a particular occupation, or public service occupation, such as religious work, charitable work, or government service;
– Incentives tied to annual charitable work;
– Matching contributions when a beneficiary gives to a particular cause;
– Incentives payable when a beneficiary marries within a particular tradition or faith;
– Incentives payable when a beneficiary has children;
– Incentives payable upon reaching a milestone in length of marriage;
– Incentives to help stay at home parents.

Other trust provisions in incentive trusts can “discourage” negative behaviors, such as:

– Terminating distributions upon criminal behaviors, excessive spending or excessively generous gifts;
– Payments tied to accomplishing addiction prevention and counseling;
– Payments tied to counseling;
– Payments tied to drug-free testing.

Redd also recommends that incentive trusts include verification procedures to assure that beneficiaries are attaining the standards required in the trust.

Incentive trusts are very common now, such that almost every discretionary trust includes express or implicit incentives.  We regularly promote these concepts with our clients, as they determine how best to help their families and promote their values without having their hand stretch farther than they desire.