A recent article in the New York Times, available here, discusses an interesting pattern among wealthy Americans. Many people who would benefit from the higher estate tax exemption and lower tax rates that went into effect last winter have opted not to make the gifts necessary to take advantage of them. One of the reasons, according to the article, is that people are hesitant to leave large amounts of money to children and grandchildren, out of fear that large gifts will discourage potential beneficiaries from working to make their own money.
One way to decrease the likelihood of this happening is to set up an “incentive trust.” This is a trust that includes incentives to the beneficiaries, encouraging certain kinds of behavior. While the article focuses on how very wealthy individuals can use these kinds of trusts, the use of incentives is an option available to anyone setting up a trust.
There are various kinds of incentives that appear in the language of trusts. One kind of incentive is an income-matching incentive. Under a trust with an income-matching incentive, the beneficiary would receive payments that match his or her income, or a percentage thereof. The incentive: the more the beneficiary earns, the more he or she receives from the trust. Other common incentives in trusts are payments contingent on the beneficiary having completed a certain type of degree, or of having entered a certain profession.
Incentive trusts can assuage fears that children who receive lifetime gifts will become spoiled or lazy. They are not, however, right for everyone. Someone who feels they have already instilled a strong work ethic in their children might deem an incentive trust unnecessary. Or, someone might prefer that their children pursue their passions, regardless of how much they earn. In any case, incentive trusts are something to consider during estate planning.