The Incentive Trust – Parenting From the Grave?

Incentive Trusts don't always work

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What is an Incentive Trust?

An Incentive Trust is a trust designed to encourage or discourage certain behaviors by using distributions of trust income or principal as an incentive. The trustee is charged with monitoring the beneficiary’s behavior. Typical Incentive Trust provisions encourage higher education, the pursuit of productive careers, or adherence to the moral, religious, or other cherished standards of the grantors, typically the parents.

Restrictions in the trust on who a beneficiary can marry – are they legal?

Law students may briefly encounter this type of trust in passing in Shapira v. Union National Bank: Mr. Shapira conditioned a portion of his large fortune to his son Daniel: either be “married at the time of my death to a Jewish girl whose both parents were Jewish …” or the inheritance will go to “the State of Israel.” To our contemporary ears this sounds preposterous, against public policy, and therefore not enforceable.
It surprises law students that the 1974 court upheld this provision, arguing that a partial restraint of marriage, which imposes only reasonable restrictions, is valid and not contrary to public policy. This issue seems to have not been frequently tested by the courts, yielding only 3 citations altogether, and no known negative appellate history. This does not, however, mean that this type of “partial restraint” on marriage would survive if challenged today.

Consider the likely outcome of the following “partial restraint”: either be “married at the time of my death to a person of the opposite sex …”,  or the assets will go to “the Internal Revenue Service.” The preceding is a hypothetical, but it illustrates one important principle that may jeopardize Incentive Trusts: The changing mores of our society, and the unpredictability of what future courts may decree. Valid provisions in one era may be unacceptable in another.

Can good behavior be forced through an incentive trust? Or should you trust your children?

I recently encountered a 2008 trust that was to pay the principal to the beneficiaries only if they earned at least a certain amount of money per year. The disturbing thing is that neither the elderly settlor nor her beneficiaries knew (or had any recollection) that this provision was in there.

An Incentive Trust is often contemplated by parents who suspect that their children lack initiative, motivation, and self-directed behavior. Research has shown that external motivators, such as an Incentive Trust, do not promote self-efficacy, and may, instead, have the opposite effect. External rewards forestall self-motivation. For an excellent discussion of these effects and for further reading on this topic, see Do You Tru$t Your Children: A Parent’s Final Dilemma.

Incentive Trusts – Let the Games Begin!

From a drafter’s (attorney’s) perspective, Incentive Trusts require reconciliation between specificity and flexibility, a very hard thing to do. In one trust the beneficiary, Tommy Manville Jr., was to be rewarded for finding a wife, getting married, and settling down. The triggering condition was marriage, so he got married whenever his money ran out, 13 times (source). Estate planners all know about less egregious but more widespread examples of gaming the system or simply engaging in fraud, by, for example, producing falsified grade reports, etc.

Flexibility is needed, for example, to allow that incentives are fair. Consider brother and sister, both attorneys, she is a partner at a Wall Street law firm, he works in a responsible position in the US Department of Justice. Incentive Trusts frequently stipulate to match or distribute a portion of what the beneficiary earned the previous year. Considering the disparity in the reward, did the parent’s really want their son to give up his public interest work?

Incentive Trusts – The Unique Circumstances Matter

Still, under certain conditions, and if carefully drafted, an Incentive Trust may be a useful tool, but not for certain families under their unique circumstances.  Klaus Gottlieb, Esq., at Wealth Care Lawyer has the insight and experience to explore complex family situations to design a plan that is fair and keeps family relationships intact. 

See also: Trusts – A general overview

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