In recent years, “incentive trusts” have been widely discussed in the popular press as a creative way to encourage certain behaviors of trust beneficiaries. An incentive trust typically requires distributions to a trust beneficiary once he or she attains certain goals (e.g., graduates from college, buys a house, gets married, to match his or her annual salary, etc.).

While the concept appeals to many clients, we generally advise against incentive trusts because (1) they can have unintended consequences, and (2) clients can achieve similar objectives and additional benefits by using precatory trusts with non-binding incentive provisions.

The mandatory nature of incentive trusts, combined with potentially unclear provisions describing desired goals, can lead to disputes and even litigation regarding when a goal is attained and a distribution required. For example, does graduation from college include a two-year community college program? Should matching distributions for a beneficiary’s salary reflect salary deductions for taxes or contributions for retirement plans and group health insurance? Further, the incentives may not operate as anticipated. A trust that requires matching salary distributions may discourage a beneficiary from pursuing careers in fields that may be personally or socially rewarding because they provide lower salaries (for example, artists, social workers, employees of non-profit and charitable organizations, etc.).

In contrast, precatory trusts provide non-binding guidance to the trustee regarding the client’s desires for distributions to beneficiaries. This guidance can be customized to reflect the client’s specific goals for future generations and can adjust to the changing needs of beneficiaries over time. For example, the client may request that distributions focus on a beneficiary’s (i) living, recreational, and educational expenses until age 25, (ii) efforts to acquire a home or establish a business between ages 25 and 35, (iv) funding of children’s educational needs between ages 35 and 50, and (v) retirement goals beginning at age 50.

Ultimately, precatory trusts can foster desirable behavior in beneficiaries, while also providing increased creditor protection, less potential for conflicts, and more flexibility for the trustee to adapt distributions to a beneficiary’s unique circumstances. Thus, in most cases, a precatory trust will better meet a client’s overall desires with regard to long-term family wealth management and distribution.