An incentive trust is a viable option for any client who is concerned that wealth for the next generation, rather than enhancing a life or providing opportunities, will lead to lack of motivation, lack of self-sufficiency, or addictive or self-destructive behavior.
Andrew Carnegie wrote that “the parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would.” Our clients demonstrate to us on a regular basis that wealth is not always a constructive tool. Any parent would like to think leaving wealth to a child will enhance that child’s life and, perhaps, provide opportunities that the child may not have had otherwise.
com tcampbell lawmwc Terry L. Campbell, Marquette 1979, is the managing shareholder at
Moertl, Wilkins & Campbell, S.C., where he concentrates his practice on estate planning, elder law, and taxation.
Unfortunately, wealth can lead to a loss of motivation. If a child or grandchild realizes he will never need to work to maintain an accustomed manner of living, why bother going to college? If an individual has access to personal financial wealth, is there still an incentive to get up at 6 a.m. to go to work? Does the passing of wealth enhance a life, or does it “deaden” talents and energies?
An Incentive for Education
An incentive trust is a tool we use for clients concerned with these issues. These trusts can be structured in many ways with different points of emphasis, such as encouraging education. For example, an incentive trust could:
- Require a beneficiary graduate from college in order to receive money.
- Reward a beneficiary for doing charitable work.
- Enhance the income of a beneficiary who chooses a low paid but meaningful career.
Education is not generally intended to provide a beneficiary a means of being a professional student. An incentive trust may require that the Trustee shall pay for only a set number of years for undergraduate education:
- No distributions for tuition or room and board shall be made for a child after he/she has attended an undergraduate college or university for five years.
- A distribution cannot exceed the amount which would be spent on room and board and tuition, had my child attended the University of Wisconsin-Madison.
There are occasions where a beneficiary already suffers from addictive or self-destructive behavior. A provision of an incentive trust may require a beneficiary to submit to random drug testing and should a beneficiary pass, e.g. three successive random drug tests, the beneficiary is entitled to a monetary distribution.
Family dynamics may be another important factor. This could mean attending family functions or maintaining certain communication with family members. For example, an incentive trust can state your intent:
“It is my intent for my children to spend time with my brother, and it is my hope that they will vacation together each year. My Trust shall pay for any expenses related to such a vacation, and each child shall receive a $5,000 bonus distribution at the end of any calendar year in which he or she has taken such a vacation.”
Leona Helmsley required her grandchildren to visit their grandfather’s grave once a year and sign in as evidence of their visit in order to receive their distribution.
Charitable or philanthropic work may be extremely important to a client, and a common goal may be to encourage that same conduct in children and grandchildren. Monetary incentives can be included for doing volunteer work or participating in charitable endeavors. There may be trust provisions to encourage a beneficiary to stay home and raise a family. For example, the beneficiary may be compensated along the same lines as he or she would have if they had continued with a career.
A Need for Flexibility: Unexpected Circumstances
A common danger with an incentive trust is the failure to plan for unexpected circumstances. As circumstances change, the incentives outlined in a trust may no longer be able to be achieved. For example, an individual may become disabled and no longer able to work. If an incentive trust is based on employment and producing a W-2 in order to receive distributions, what happens at retirement or if there is a disability? Will the trust match social security? Will the trust provide an annual income based upon a percentage of the wages earned over a period of time?
Therefore, an incentive trust is not easy to draft. Our client needs to define the objectives and we need to identify the concerns. However, it can provide an opportunity to be creative and to establish safeguards so that wealth will enhance and not hinder the life of the beneficiary.