You’re looking for an effective way to get your heirs to do what you think is best for them, for the family, and for the world. Is an incentive trust the right vehicle to accomplish that?
An incentive trust is much like a traditional irrevocable trust, except it sets specific conditions on trust distributions. Some people establish incentive trusts to make sure beneficiaries stay in the family business. Others want to encourage higher education or public service. Some want to discourage behavior — laziness, reckless spending, or drug use. Still others want to encourage beneficiaries to get married and raise a family.
What to Think About
There are a number of issues that could affect the design and implementation of an incentive trust. Consider these points carefully:
- Goals — What behaviors do you want to promote? Incentive trusts are often created to encourage beneficiaries to pursue higher-education degrees. Discouraging reckless consumption and unproductive behavior are other common reasons behind incentive trusts. Think about what matters to you and your beneficiaries. What goals are fair and reasonable for you to expect your beneficiaries to achieve?
- Coordination with your estate plan — Incentive trusts are just one component of an estate plan. Decide whether you want to create a separate incentive trust or build incentive clauses into a trust designed for another purpose. Make sure the incentive trust doesn’t conflict with or detract from other components of your estate plan.
- Duration — How long do you want the incentive trust to last? For grantors with substantial wealth, a trust may span many generations. Can you realistically set expectations for beneficiaries who aren’t even born yet?
- Beneficiaries — Who will benefit from the monies disbursed from the incentive trust? Considerations here are similar to those for any kind of trust: who do you include and exclude?
- Trustee designation — The trustee of an incentive trust typically has a more difficult job than the trustee of a simple traditional trust, since he/she must decide when beneficiaries have met the conditions you specified. Make that job easier by writing conditions that are objective and easily measured.
How to Prepare an Incentive Trust
If you decide an incentive trust may be right for you, you should:
- Sit down with your beneficiaries and trustee to discuss your goals for the trust. The likelihood your beneficiaries will later resent the incentives is greater without this discussion.
- Build flexibility into the trust to accommodate changes in circumstances. This will mitigate unintended and undesirable consequences.
- Ensure the conditions you want to include comply with state and federal laws. If you don’t want to establish an incentive trust, you can limit each beneficiary’s inheritance to an amount that isn’t likely to encourage reckless consumption and unproductive behavior. If your interest lies in philanthropy, another alternative is to establish a private foundation and name your beneficiaries as board members. That way, your money is still controlled by your beneficiaries, but it is put to charitable use. Please call if you’d like to discuss incentive trusts in more detail.