Using Incentive Trusts to Improve Your Family Legacy
Updated: May 9
Parents spend a great deal of time educating their children on a variety of topics. Money management is one of those topics which often proves challenging. From generation to generation, attitudes towards money have changed and will likely continue to change. However, with a significant amount of wealth set to transfer over the next couple of decades, many financially successful families are looking for solutions to ensure their hard earned money is not put to waste. The worry that children and grand-children will not be responsible enough to handle a large inheritance is further complicated by the next generation’s concerns that they are not quite ready for the pressures and responsibilities that come with inheriting the wealth.
A solution to this issue which is gaining more and more popularity, is the use of what is informally known as an “Incentive Trust”. When properly employed, this type of trust can be an effective tool in promoting success within your family and reinforcing values that matter to you.
What Is An Incentive Trust? An incentive trust operates as a sort of “conditional inheritance” for beneficiaries named in the trust, and is designed to encourage or discourage certain behaviours, by using distributions of trust income, or principal, as an incentive. A typical incentive trust might encourage a beneficiary to complete a degree, enter a profession, or abstain from harmful conduct such as substance abuse. The beneficiary might be paid a certain amount of money from the trust upon graduating from college, or the trust might pay a dollar of income from the trust for every dollar the beneficiary earns. In an incentive trust arrangement, the trustee must adhere to specific requirements set out by the grantor, regarding what conditions the trust’s beneficiaries must meet in order to receive funds from the trust.
As with any type of trust, there are costs associated with the development and ongoing administration of an incentive trust. The costs and the time involved in establishing this trust are just two factors you’ll need to consider when deciding whether or not this arrangement is right for you. Next, you’ll need to take into consideration some of the unique advantages and disadvantages of the incentive trust.
Advantages Disadvantages • Motivating Positive Behaviour • Resentment • Age Restrictions • Hindering Entrepreneurship • Encouraging Education • Setting Unrealistic Goals • Promoting a Healthy Lifestyle • Overlooking Other Needs • Family Business or Employment • “Controlling Life from the Grave” • Endorsing Philanthropy
Those interested in establishing an incentive trust need to know there are limits. The law has evolved to limit how far you may rule from the grave. Certain conditions may be deemed invalid for public policy reasons. Therefore incentive trusts must be carefully considered and drafted. You may want to consider the soft or emotional side of the equation as well. Efforts to foster what a parent deems good behaviour (or to discourage bad behaviour) could backfire, resulting in rebellion or alienation. Benefactors also need to take into account that money is not the sole, or even the most significant, driver of behaviour. It would be naïve indeed to assume that the promise of a trust fund distribution could be powerful enough to defeat the scourge of addiction, or to transform a less-than-ambitious child into an industrious worker.
The key to the success of an incentive trust is good communication: make sure you discuss the intentions and restrictions of the trust with the trustee (the person or organization managing the trust) and the intended beneficiary.
When used properly, however, an incentive trust can encourage higher education, philanthropy, a strong work ethic, healthy living and sound financial planning, and prevent the misuse of wealth. You can pass on something more valuable than money to your family’s younger generations - you can pass on valuable life lessons.