Incentive Trusts: Aligning Wealth with Values
Posted by D’Marie Kleeman on March 20, 2025
Incentive trusts are a unique estate planning tool that allows you to distribute your wealth while encouraging specific behaviors or achievements among your heirs. Unlike traditional trusts, incentive trusts require beneficiaries to meet certain conditions before receiving distributions. These conditions can reflect your values, such as pursuing higher education, maintaining employment, engaging in charitable work, or avoiding destructive behaviors.
Establish Guidelines
Incentive trusts set guidelines for beneficiaries to become eligible for distributions. For example, distributions might be contingent on graduating from high school, earning certain grades, or completing college. Alternatively, you might focus on a beneficiary's physical well-being by disallowing payouts if they engage in harmful behaviors like substance abuse. This approach requires appointing a trustee who can monitor and enforce these provisions.
Corporate and Philanthropic Motivations
From a business perspective, incentive trusts can reward beneficiaries for involvement in the family business or pursuing their own career paths. Including matching charitable donations can foster an appreciation for community service and volunteerism.
Risks and Considerations
Incentive trusts come with risks. If the conditions are too restrictive or unsuitable for the beneficiary, the trust may backfire. For instance, a beneficiary might refuse to meet the conditions due to personal conflicts or lack of interest, leading to unfulfilled lives or strained family relationships.
Effective Communication
Clear communication with your trustee is crucial. Trustees should have broad discretionary powers to adapt to changing circumstances, such as a beneficiary developing disabilities that prevent them from meeting academic goals. The trust should provide a safety net to support the beneficiary even if they fail to achieve the trust's goals. Additionally, provisions should be made for secondary beneficiaries if the primary beneficiary fails to meet the goals or passes away.
Contact your tax professional if you have questions about incentive trusts.
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D’Marie is a tax principal with experience in all areas of U.S. Federal and New York State taxation. While specializing in performing tax services for individuals, trusts, and estates, she also provides tax services to commercial businesses, real estate-related businesses, privately held businesses, and private foundations.