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Incentive Trust Provisions--a Carrot or a Stick!

Incentive trust provisions are designed by estate planning attorneys for clients who wish to promote or discourage specific behaviors or lifestyles by their beneficiaries. These provisions make or withhold Trust distributions to accomplish certain intended results. In essence, under the old idiom, the provisions act as a "carrot or a stick." They either reward certain behaviors and accomplishments or they seek to deter them. Some examples provide the best understanding of how these provisions work.

If a parent has a teenage son and wants to give him incentives to reach a certain accomplishment, the parent might put a provision in their Trust as follows: "I devise to my son one-third of my Trust estate to be received upon his reaching age 25. Notwithstanding the foregoing, if my son graduates from a four-year college or university before reaching age 25, then my Trustee shall distribute my son's Trust share to him upon his receiving his Bachelors degree." This type of provision is a "carrot" in that it is intended to motivate the beneficiary.

Similarly, if the parent is concerned about the son because of a substance abuse problem, the parent might put a provision in their Trust as follows: "I devise to my son one-third of my Trust estate to be received upon his reaching age 25. Notwithstanding the foregoing, if my Trustee determines, in his or her sole discretion, that at the time for distribution my son is abusing alcohol or illegal drugs, my Trustee may withhold distribution until such time as my Trustee is satisfied that my son has not abused alcohol or illegal drugs for a period of at least one year." This type of provision acts as a "stick" in that it is intended to deter the beneficiary from engaging in certain behavior.

Incentive trust provisions have both favorable and unfavorable aspects. The details of those aspects will be addressed in a subsequent blog posting.

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Attorney Michael Lins
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