When someone creates an Incentive Trust for the benefit of another, they are typically trying to tie distributions from the trust to a beneficiary's specific behavior. Right or wrong, many incentive trusts have been created over the years in an attempt to influence beneficiaries to graduate from college, maintain a certain grade point average, be drug-free, avoid criminal conduct, or maintain employment.
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While creating an incentive trust may make you confident that you are giving positive encouragement to your family, you just might wind up providing coercive pressure when you stipulate hard and fast rules that must be followed well into the future.
Incentive trusts that provide for a match to a beneficiary's W-2 or self-employment income may go bad when the beneficiary turns out to be a stay-at-home parent, or does charitable or missionary work. An incentive trust that rewards good grades at an accredited college may not work for someone who is not "college material," or for someone who works their tail off but cannot meet the objective standards you created in the incentive trust.
Problems with incentive trusts range from the fact that the Settlor can't predict future family situations or societal norms. And what if a child or beneficiary of an incentive trust has an injury or illness that prevents him or her from meeting your standards?
An alternative to the incentive trust that has hard and fast rules is to select a strong trustee or co-trustees. Share your philosophy regarding the types of behaviors you would like to reward, and then allow the trustee to exercise their discretion in the future based on circumstances at the time of distribution.
Think twice before creating an incentive trust. Your intent may be in the right place, but your ability to predict future family circumstances, and future societal norms, may not be that great.
This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.
Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450
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