Use Your Estate to Motivate With an Incentive Trust

Many people think of their estate plan as, ultimately, a passive concept. That is, it can transfer your wealth to beneficiaries, but it can’t really give them your wisdom or help them make sound life choices. One way to shift this paradigm, so to speak, is to create an incentive trust. It uses the “carrot and stick” concept to help shape your loved ones’ lives rather than only contribute to their finances.
Achieving Goals

Essentially, an incentive trust sets guidelines for how a beneficiary becomes eligible to benefit from the trust. Distributions can, for instance, be contingent on a beneficiary graduating from high school, earning certain grades, or enrolling in or graduating from college.

Then again, perhaps you’re more concerned about a beneficiary’s physical well-being than his or her intellectual one. In this case, you might structure an incentive trust to disallow payouts if the beneficiary indulges in harmful or illegal behavior such as abusing alcohol or using illegal drugs. Going this route will, however, require that you appoint a trustee who knows the issues and who can monitor the beneficiary’s activities and enforce the provision.

From a business perspective, an incentive trust can include provisions that reward your beneficiary for becoming involved in the family business or mapping out a career path of his or her own. Build in matching charitable donations and you can help the beneficiary develop an appreciation for community service and volunteerism.

Risking it All

Of course, incentive trusts come with some inherent risks. If the provisions are too restrictive, or simply don’t suit the beneficiary in question, the incentive may backfire.

For instance, say Esther, a 20-year-old college dropout, learns that her Aunt Esmeralda has provided her with $500,000 in trust. But Esther can withdraw the trust funds only if she returns to college and earns a bachelor’s degree.

Problem is, Esther never really liked Aunt Esmeralda, who often scolded her for making bad choices and meddled in her life. And Esther didn’t really like college either. As a result, the trust only furthers Esther’s resolve to never return to college — no matter how much money she loses.

In other cases, the beneficiary may force him- or herself to complete a degree but wind up living an unfulfilled life because he or she had other dreams in mind. Or you might end up “motivating” a beneficiary to work for the family business when he or she really doesn’t want to, which, in turn, could hurt the company.

Communicating With Clarity

A big part of making sure an incentive trust will work is clearly communicating with your trustee.

He or she should generally have broad discretionary powers because, as time passes, a beneficiary’s circumstances might change. For example, a student might develop learning or other disabilities that prevent him or her from achieving the academic goals set by the incentive provisions.

In general, the trust should provide enough of a safety net that, if the beneficiary fails to achieve the trust’s goals, he or she will still be able to support him- or herself. The incentive provisions can apply to only a part of the trust assets. The trust should also provide for giving some or all of the funds to a secondary beneficiary, in case the primary beneficiary fails to meet the stated goals or dies.

Doing Right (and Just Enough)

When all is said and done, you can use an incentive trust to do right by your beneficiaries — and give them just enough motivation to better themselves. If you go overboard with that motivation, you may wind up putting your estate — and your legacy — at risk.

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