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Some Pros and Cons of Incentive Trust Provisions

| Oct 8, 2015 | Elder Law, Estate Planning, Probate |

As discussed in a previous blog, 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, the provisions act as a “carrot or a stick.” They either reward certain behaviors or accomplishments or they punish or seek to deter them. 

Incentive trust provisions have some positive and negative implications. On the positive side, they allow a Settler/Grantor of a Trust to entice a beneficiary to accomplish certain goals or objectives (.i. a “carrot”), or to restrict certain behaviors or lifestyles (a “stick”). From the perspective of the Settler/Grantor, these are usually viewed as favorable or “pro” aspects of the incentive trust provisions. However, there are also some potential negative or “con” aspects.

First, one criticism is that these provisions attempt to control a beneficiary “from the grave.” In fact, from the standpoint of the Settler/Grantor, this is true and would not be viewed as a negative. However, from the beneficiary’s standpoint, such control is often not viewed favorably–in fact, it is often a source of bitterness and contention. So, if a Settler/Grantor includes incentive trust provisions, it may be a source of friction in the family, either before the death of the Settler/Grantor, or after.

A second criticism of incentive trust provisions is that they can be a source of litigation if a beneficiary disagrees with Trustee in their application of the provisions. This is because some incentive trust provisions require some discretion or interpretation by the Trustee in their application. An example might best demonstrate this.

Take a situation where a parent is concerned about a son because of a possible 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.” If a Trustee then refuses to distribute to the son on the belief that he is using drugs, the beneficiary might challenge that by claiming that he either is not using drugs or that he quit and sufficient time has gone by that distribution should be made. The fact that the Trustee has discretion in the application of the provision may satisfy the Settler/Grantor that the son will be protected but it may also invite future disputes. Obviously, these conflicting outcomes should be weighed by the Settler/Grantor in setting up the Trust.

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