Estate planning isn’t just about passing wealth down to the next generation. For many, it’s also about passing down values and to encourage their children to lead responsible, productive, and fulfilling lives. One way to reach this goal is an incentive trust, which sets conditions on when beneficiaries receive distributions, incentivizing them to behave in ways that you find valuable.

Incentive trusts can be effective, but they should be planned and drafted carefully to avoid unintended consequences. Let’s examine four tips for designing a more effective incentive trust.

Tips for Incentive Trusts

1. Focus On The Positives

Avoid negative reinforcement, such as conditioning distributions on the avoidance of undesirable or self-destructive behavior. This sort of “ruling from the grave” is likely to be counterproductive. Not only can it lead to resentment on the part of your heirs, but it may backfire by encouraging them to conceal their conduct and avoid seeking help. Trusts that emphasize positive behaviors, such as going to college or securing gainful employment, can be more effective.

2. Be Flexible

Leading a worthy life means different things to different people. Rather than dictating specific behaviors, it’s better to establish the trust with enough flexibility to allow your loved ones to shape their own lives.

For example, some people attempt to encourage gainful employment by tying trust distributions to an heir’s earnings. But this can punish equally responsible heirs who wish to be stay-at-home parents or whose chosen careers may require them to start with low-paying, entry-level jobs, or unpaid internships. A well-designed incentive trust should accommodate nonfinancial measures of success.

3. Consider A Principle Trust

Drafting an incentive trust can be a challenge. Rewarding positive behavior requires a complex set of rules that condition trust distributions on certain achievements or milestones, such as gainful employment, earning a college degree, or reaching a certain level of earnings. But it’s nearly impossible to anticipate every contingency.

One way to avoid unintended consequences is to establish a principle trust. Rather than imposing a complex, rigid set of rules for distributing trust funds, a principle trust guides the trustee’s decisions by setting forth the principles and values you hope to encourage, and providing the trustee with discretion to evaluate each heir on a case-by-case basis. Keep in mind that for this strategy to work, the trustee must be someone you trust to carry out your wishes.

4. Provide A Safety Net

An incentive trust need not be an all-or-nothing proposition. If your trust beneficiaries are unable to satisfy the requirements you set forth in your incentive trust, consider offering sufficient funds to provide for their basic needs and base additional distributions on the behaviors you wish to encourage.

According to Warren Buffett, the ideal inheritance is “enough money so that they feel they could do anything, but not so much that they could do nothing.” A carefully designed incentive trust can help you achieve this goal. If you have questions regarding the use of an incentive trust, please contact us.