Influencing Beneficiary Behavior Through Trust Incentives

Trusts are an important estate planning tool. Trusts allow one to ensure their assets are protected from unnecessary taxation and government interference and, almost just as important, permit intentional asset distribution at defined points.

Unlike a will, where you just say who gets your stuff once you pass away, a trust allows you to establish parameters for how and when your assets are distributed. This flexibility allows the settlor (the person who established the trust) to influence the behavior of their beneficiaries. The settlor can incentivize the beneficiaries by establishing benchmarks that the beneficiary must meet to reach asset distribution. The three most common incentive goals I see are related to education, productivity, and charitable endeavors.

Educational Goals

Asset distribution tied to educational goals is a common tool I see in trusts for young beneficiaries. It is typical for parents to note in their trust that the assets may be used for “college” for their children.  However, it’s important to provide objective boundaries for what constitutes “college” expenses might be allowable under the trust.

First, define what “college” type of school are you referring to when you say “college”? Is a community college acceptable? A four-year state university? A private, unaccredited school in a remote forest? What about graduate school for advanced degrees? It’s important to define what would constitute “college”, but also take into consideration the beneficiary and what path they might pursue. Don’t rule out trade schools or college alternatives.

Second, define what “college” expenses would be payable under the trust. Is it just tuition? Tuition and living expenses? What about books, computers, student activity fees? Be clear about your intentions and what is and is not an allowable expense under the trust.

Third, provide benchmarks for the circumstances that would trigger “college” expenses to be paid. Would you want the beneficiary to receive a lump sum payout after they’ve earned the degree? Or maybe provide a payout after each successful semester or quarter? What about GPA? Should they have to maintain a 3.0 or higher?

With educational goals it’s important to remember that you are trying to incentivize certain behavior. It might seem callous to out a GPA requirement on the payout, but you’re trying to get the beneficiary to work toward a goal. You probably don’t want to be stuck in a situation where you’ve paid for 6-7 years of college expenses for the beneficiary to dropout without a degree. Be clear about your goals.

Productivity Goals

You want your beneficiary to learn a work ethic, but you also want to leave them your assets. Those goals are not mutually exclusive. Productivity goals are a good tool to incentivize the beneficiary to work to earn an income before receiving your assets.

For example, you could set up a trust to provide dollar-for-dollar matching distribution. The match would be based on whatever income is reported on W-2s for the previous year. If they earned $36,000 working a menagerie of part-time jobs, then the trustee would be authorized to distribute $36,000.

You could also add other requirements, like the work must be full-time or they must work a certain number of hours a week to earn the trust distribution. Again, you’re trying to incentivize them to work.

The key with productivity goals is to ensure that the beneficiary will engage meaningful employment based on their abilities. The difficulty though is that you can’t predict the future as to what meaningful employment might look like for the beneficiary. If the beneficiary suffers a horrible accident and has trouble holding down part-time work, would you want them to be cutoff from your trust? It’s advisable to allow trustee discretion for productivity goals in the event the beneficiary is legitimately limited from reaching the productivity goals.

Charitable Goals

Charitable goals are the final common goal for incentive trusts. Charitable goals arise when you want to ensure that your beneficiaries do good in the world. This usually arises by requiring the beneficiary to volunteer for a certain number of hours or donate a percentage of their income to defined charitable causes to receive payment under the trust.

Charitable goals also arise in the context of directing ecclesiastical work. Trusts can hold clauses that allow for payout in the event of missionary trips or seminary courses. The key with charitable goals is ensuring that the beneficiary’s charitable work is work that the trustee would support. This is where it’s important to set clear definitions of what charitable work would and would not trigger payment under the trust.

In conclusion, as I mention all the time, it’s critical that you Make Your Plan. Don’t do just what somebody else tells you to do. And don’t use one of those fill-in-the-blank forms you can find online or at an office supply store. I want to work with you to Make Your Plan to ensure your loved ones receive exactly what you want them to receive.

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