What is an "Incentive" Trust?

Just like it sounds. 

And most likely B.F. Skinner's estate plan included incentive trusts (or, at least, it should have).

An "incentive" trust provides a series of "carrots and sticks" tied to inheritance distributions to encourage positive behavior and dissuade negative behaviors.

See, I actually went to a few (very few) of those Psych 101 lectures my freshman year at KU!

I digress.

So, how do you help make sure an inheritance is a blessing and not a curse for your loved ones?

The Greater Wilmington Business Journal took up this topic in a recent article titled “Trusts Can Include Incentives For Heirs To Act Responsibly.”

Bottom line?

You must use care when creating an incentive trust. 

Attempting to control too many aspects of an heir’s life can be counterproductive.

Some call it trying to “rule from the grave.”

Common examples “incentives” include completing a certain degree or entering a certain line of work. 

Problem: What if the incentives create a classic "lose-lose" scenario?

What if you require your grandson to become an artistic working in watercolor pastels of New England landscapes, but he is a nuclear physicist with an impressive collection of velvet Elvis art?

Not good.

Nonetheless, where a clear pattern of negative actions exists, the right incentives can encourage an heir to make better life choices.

Think substance abuser or a video game slacker. 

Again, it is key that you be realistic.

For some, the promise of inherited money may not be enough to overcome a pattern of severe substance abuse.

However, the threat of giving the inheritance to charity if specified incentives are not met might do the trick. 

In addition, the original article recommends attaching age restrictions. 

What if you have a loved one who is absolutely irresponsible with money?

Consider creating a trust structured to control access as to "when" and "how much" regarding distributions of principal.

So-called "staggered" distributions can mitigate the "blow it all at once" temptations.

In addition (or alternatively), set up a "matching funds" program.

Here is how it works: For every dollar earned on a W-2 Form, a matching dollar is distributed from the incentive trust.

This can encourage development of a "work ethic" and reduce the risk the beneficiary will see himself or herself as a "trust fund" brat.

What about helping an addicted loved one get straight?

Tie the inheritance to getting and then staying clean through random drug testing.

Yes, a little tough love can go a long way ... like for generations.

In the end, while some may be tempted to disinherit a wayward loved one, an incentive trust can work as an escape clause.

Your prudent estate planning just might be the incentive to helping a loved one turn his or her life around.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there. 

Reference: Greater Wilmington Business Journal (November 1, 2015) “Trusts Can Include Incentives For Heirs To Act Responsibly”