Long-Term Tough Love: Incentive Trusts Provide Assets to Successive Generations

Estate Planner Sept-Oct 2000
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Striking the right balance between encouraging your children to accomplish their goals and providing for their needs can be difficult to achieve during your lifetime. Reaching the desired results when you are no longer around is even harder. With the resurgence of long-term dynasty trusts — through which assets are retained in trust generation after generation — comes a renewed interest in providing distribution incentives designed to encourage the trust’s beneficiaries to lead productive lives. This approach is referred to as an incentive trust. These incentives are often coupled with disincentives to discourage inappropriate behavior.

If you are considering leaving assets to successive generations in trust, you’ll want to consider the variety of incentives and disincentives available. Let’s take a closer look at how incentive trusts work.

Communicate Your Objectives 

The first step in establishing an incentive trust is to communicate your objectives for the trust. A statement concerning your intentions can set the tone for trust distributions for years to come. These intentions may include:

  • Allowing beneficiaries to live off the trust assets, and
  • Allowing the trust to provide security but not necessarily a sole means of support.

In addition to a general statement regarding the proper uses of trust assets, you can set forth more specific directions for the trustee to follow. But be careful to provide for contingencies that might arise. For instance, you could include provisions that prevent trust assets from impairing a beneficiary’s motivation to be a productive citizen.

Encourage Education

If you value education and wish your beneficiaries to attain a certain level, then you may want to provide extra incentives to encourage scholastic achievement. Begin by providing the trustee with broad authority to distribute funds to beneficiaries pursuing their educations. Make certain to permit the trustee to pay not only for tuition and room and board, but also for a broad range of educational activities including travel, lessons in the arts or religious education. Identify the types of schooling you wish to encourage, whether private school, vocational school, graduate programs or schooling abroad.

You also may wish to consider additional monetary incentives to encourage beneficiaries to pursue these objectives. One way is to direct the trustee to provide beneficiaries with a stipend while they are pursuing their educations. In addition, consider providing a reward to beneficiaries who obtain desired levels of academic achievement, such as grades or degrees. These rewards and stipends can help offset forgone opportunities to earn outside income while pursuing educational objectives.

Discourage Negative Behavior

In addition to rewarding positive behavior, an important part of incentive trusts is to discourage negative behavior. Unfortunately, some beneficiaries may need encouragement to be productive members of society. Ensure that trust assets will not be used to subsidize nonproductive behavior. If a beneficiary is unable to handle money because of self-destructive behavior such as drug abuse, indolence or being under the control of others that would take advantage of the beneficiary’s generosity, the trustee should be empowered to address such concerns.

You may want to authorize the trustee to retain in trust any distributions that would otherwise have gone to the troubled beneficiary. You may even want to authorize the trustee to take more drastic measures. For example, you could empower the trustee to distribute funds as if the troubled beneficiary were deceased. It may be possible in such cases to provide support to the family of such a beneficiary.

Provide for Future Generations 

Incentive trusts can encourage a beneficiary’s development and protect the trust by preventing misuse of funds so that succeeding generations can also benefit from your legacy. Consult a professional advisor to learn how to include incentive trusts in your estate plan.