Of course, trusts have long come with “strings attached.” One of the most common is an age
restriction. A child might not receive income or principal from the trust until reaching a
certain age, such as 25, 30, 35, or even later. This allows the beneficiary to mature—an 18-
or 21-year old is less likely to handle the money as well as the person would at 25 or 30,
goes the theory. Another approach is to stagger distributions over benchmark ages, to give
them the opportunity to learn how to manage money well.
Today’s incentive trusts, however, often go beyond age restrictions. They are intended to
motivate certain positive behavior by the beneficiary. For example, the wealthy often worry
that their children have developed a poor work ethic, having grown up with wealth.
Accordingly, a trust might provide incentives to work by distributing money only if the
beneficiary earns money on their own. If the beneficiary earns a certain level of pay, the
trust might pay out a matching amount for each dollar earned by the beneficiary. Some match a
higher amount the more money the beneficiary makes.
An incentive trust might pay income or principal, or perhaps pay a larger amount or pay it
sooner, if the beneficiary graduates from college, maintains a certain grade point average,
does work for the family charitable foundation, takes over the family business or donates a
certain amount to charity. Some trusts won’t pay out money unless the beneficiary stays free
of drugs, alcohol or tobacco. In fact, many trusts can be as restrictive as you want them to be as long as the restrictions
are not illegal. For example, you can’t specify that the beneficiary must marry someone of the
same race or that they must divorce their current spouse, though some advisors assert that it
is possible to restrict the trust should the beneficiary marry someone in a different faith.
The deeper issue is whether such restrictions is a good idea. Critics complain that “ruling
from the grave” often creates resentment, even hatred. Children resent being parented when
they are in adulthood, and incentive trusts are merely the parents’ effort to instill behavior
and teach values they failed to instill when the child was growing up. Some say such
incentives usually don’t work, anyway. If the child is immature at 25, why assume the child
will be mature at 40 when distributions begin? And there can be the problem of restrictions
that are vague, such as defining certain ethical behavior.
Proponents argue that it is naïve to assume that a trust with no restrictions doesn’t also
have an impact on the beneficiary. It’s well known that inheriting large amounts of money can
create deep emotional problems for the beneficiary. Why not set up the trust to encourage
positive behavior and positive inheritance experiences? Proponents also believe that there is
nothing wrong with trying to instill values in your children, even if they are adults. A key,
they say, is to discuss these restrictions with the beneficiaries before the trust creator
dies. This not only helps minimize misunderstandings, but also helps them plan their own
financial life.
You can create a new incentive trust, or add incentives to an existing trust. Many kinds of
trust can be used as an incentive trust: an insurance trust, living trust, credit shelter
trust, dynasty trust, a generation skipping trust or a Crummey minor trust to name only a few.
Just be sure you have the trust drawn up carefully, and that you carefully pick the trustee or
successor trustee (in the event it must be administered following your death). These trusts
usually should give the trustee some flexibility for unforeseen circumstances. Incentive
trusts also often provide enough “safety net” so the beneficiary doesn’t become destitute.
E-mail this story to a friend
January 2001 — This column is produced by the Financial Planning Association, the
membership organization for the financial planning community.
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