Incentive Trusts Require Careful Planning
It can be a real dilemma: on the one hand, you want to pass on the wealth you’ve
worked hard to earn, but on the other hand, you don’t want a large inheritance to
dull your children’s work ethic, or leave them with a sense of entitlement. One
possible solution to this dilemma is the incentive trust.
What is an Incentive Trust?
Under this arrangement, assets are placed in trust and there are defined
circumstances under which a beneficiary will receive funds from the trust. For
instance, trust distributions can be tied to grade point average, the salary earned
by a beneficiary, or even clean drug screens.
As effective as an incentive trust can be for ensuring that beneficiaries don’t
venture into adulthood behaving like “trust fund babies,” a trust that is not
carefully thought out and well drafted can have unintended consequences. For
instance, a trust that distributes matching funds for a child’s annual salary can
have the unforeseen effect of pressuring that child to avoid lower-paying but
valuable employment as a school teacher or an employee of a nonprofit. Another
risk is that an incentive trust can foster resentment in a beneficiary, who might
see the trust as your way to control his life choices from beyond the grave.
An Effective Incentive Trust
So, how do you establish an incentive trust that accomplishes its purpose and is
not overflowing with unintended consequences? There are a number of
strategies you can use, but the two key concerns when it comes to incentive
trusts are flexibility and communication.
The trust should be drafted so that it’s not too rigid, and it should allow for
legitimate life choices on the part of your beneficiaries without punishing them.
For instance, what if your daughter wants to become a schoolteacher, or chooses
to be a stay at home mom while her children are young? These situations should
be taken into account during the drafting of the trust.
And, with incentive trusts, as with estate planning in general, the importance of
good communication can’t be overstated. Both the trustee you appoint and your
beneficiary should be clear on your goals in establishing the trust, and your
intentions for how the trust should be administered. A clear understanding of
these things can go a long way toward reducing conflict and resentment down the
In establishing an effective incentive trust, you’ll need the counsel of an
experienced estate planning attorney. He or she can point out potential pitfalls
and help you establish an incentive trust that works the way you intend.
Experienced estate planning attorneys Worcester MA of the Law Offices of James
A. Miller estate planning and business planning resources to residents of
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