Incentive Trusts: A Chance To Have It Your Way

Many folks who have labored long and hard to earn their wealth are reluctant to leave it to children or more distant relatives who may spend it in a carefree way. The solution is to include specific wishes in a trust or will. In fact, Incentive Trusts are designed to direct the trustee to give benefits only when certain desired behaviors are achieved. Trusts structured this way can encourage beneficiaries to accomplish goals.

For example, the trustee can be directed to give a beneficiary:

• $25,000 upon graduation from college
• $50,000 when getting married
• A 50 percent match of salary, and/or
• Additional compensation for performing public benefit work (e.g., teaching, social work), so that their total earnings approximate what he/she might make as a private industry executive.

Some provisions, although quite specific, might not be enforceable by law. Disinheriting a beneficiary if he/she ever marries would likely be unenforceable. However, a provision limiting annual distributions to $10,000 if the beneficiary marries a specific-named individual would likely stand up. A provision seen often these days discourages illegal drug use and requires a "clean" drug test before the trustee makes distributions. A trust might provide for distribution of a 20 percent down payment on a home purchase, provided the beneficiary qualifies for a mortgage for the balance.

Entrepreneurs often encourage trustees to make distributions for an investment in a business. Frequently, the trustee will be directed to review the merits of the investment by hiring an expert to review the business plan. Given the high failure rate of new businesses, this can be money very well spent.

If you want to create incentive provisions in your trust, you should think carefully about what you're trying to accomplish. A good first step is to write provisions in simple, clear terms. For example "graduate from college" or "be married" are clearly defined goals. However, we recommend you seek the advice of a competent attorney regarding any type of incentive you wish to include in a trust. Having the attorney draft the actual language will ensure your wishes will be carried out.

This article is for information and education purposes only and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. Clients should evaluate the merits and risks associated with relying on any information provided.