Incentive Trusts: Rewarding Good Behavior

An “incentive” trust provides a series of reward distributions to encourage positive behavior and dissuade negative behaviors. But, there’s a delicate balance of how much control you should attempt to have over your beneficiaries’ lives. At some point, it becomes counterproductive.

You want to avoid “ruling from the grave.” Common incentives used in these sorts of trusts include graduating from college (maybe with a specific type of degree), getting married, having children, staying employed for a certain number of years, staying sober, or maintaining a clean arrest record.  Whatever the incentive, it must be measurable and clear to the trustee when the distribution must be made.

Substance abuse is a very common factor when crafting incentive trusts. First, you want to dissuade your heir from continuing to abuse drugs/alcohol, but you also want to make sure your hard-earned assets aren’t wasted on drugs/alcohol.

Regardless of the reason or incentive, the best practice is a stagger distributions to avoid the “all at once” found wealth. It reduces the chance that someone will blow it all at once.

You can also structure the trust to match any funds earned by the beneficiary through a W-2 or 1099 – this incentivizes work ethic. How it works? The trustee distributed a monthly (or however often you choose) amount that matches the amount earned by the beneficiary through their employment.

Bottom line: If you think there’s a strong chance that your beneficiaries will use their newfound wealth in an irresponsible or destructive way, an “incentive” trust may be best.