Incentive Trusts

Many of us like to think that our children and grandchildren will be responsible enough to handle a large inheritance if we can afford to give it to them. But the reality is that many children and young adults are not quite ready for the pressures and responsibilities that come with inheriting wealth. There is a way for you to use wealth as a positive motivator, monetarily rewarding younger generations for their achievements - it's known informally as an incentive trust. When used in a careful, sensitive manner, this type of trust can be an effective tool for promoting success within your family and reinforcing the values that matter to you.

An incentive trust is a trust that provides innovative strategies for distributing wealth to younger generations.  Incentive trusts can be used to reward or encourage positive behavior or deter negative or destructive behavior.  To encourage or discourage certain behavior, distributions from an incentive trust are ususally tied to something that is within the beneficiary's control.  For example, if you want to encourage a beneficiary to obtain a college degree, trust distributions could be keyed to that benchmark.  If you want to encourage a beneficiary to earn a livelihood and not be a trust fund baby, distribution can be made dependent on the beneficiary having a job.  If you want to deter negative behavior like not drugs, distributions can be made only if the beneficiary passes a drug test.

Incentive trusts are clearly not for everyone.  The main benefits of an incentive trust is that it can motivate behavior (like encouraging education, promoting a healthy lifestyle, or endorsing philanthropy).  Incentive trusts do have certain detriments.   Such trusts need to be drafted carefully.  The saying "the road to hell is paved with good intentions" is applicable to incentive trusts.   Despite best intentions, a beneficiary may find that some of the requirements set out in the incentive trust (say, getting a college degree) are unattainable for him or her, and this may lead to resentment toward you or other beneficiaries who have met certain requirements contained in the trust.  Using anincentive trust to encourage specific professional goals may hinder your child's ability to pursue his or her own professional interests, be a stay at home parent, or perform meaning charitable work.

If you decide to establish an incentive trust, you should use great care when drafting the necessary documents; make sure they allow a degree of flexibility to accommodate changing circumstances and unintended effects. As a safety net, it may be advisable for the trust to contain provisons which allow the beneficiary with the ability to support a family, even if he or she fails to achieve some of the goals set out in the trust.

The key to the success of the incentive trust is good communication: make sure you discuss the intentions and restrictions of the trust with the trustee (the person or organization managing the trust) and the intended beneficiary. The trustee must understand your intentions clearly in order to enforce the provisions effectively, while the beneficiary needs to be aware of your wishes before you die so that he or she recognizes the trust distributions as rewards rather than bribes.

If you would like to learn more about incentive trusts, please contact us for a free initial consultation.


The Law Office of Richard C. Petrofsky assists clients with Estate and Gift Planning, Wills, Trusts, Charitable Planning, Special Needs Planning, Elder Law and Medicaid Planning, Estate and Family Planning for Same-Sex Couples and LGBT Individuals, Asset Protection Planning and Corporate and Business Planning in St. Louis, Missouri and surrounding areas.