Incentivizing Beneficiaries




There is an age-old debate about whether a trust encourages a beneficiary to be a responsible and contributing member of society, or whether that same beneficiary has no incentive to work hard when he or she could just as easily live a care-free life paid for by the generosity of an ancestor. The logical follow-up to that debate would be to ask whether leaving such a sum to a beneficiary is really doing them a favor. Depending upon your view of the first question, your answer to the second question will likely differ – but it doesn’t have to. Today, many clients incentivize their intended beneficiaries in such a way that causes them to only be allowed to receive a trust distribution if certain behaviors are continued or outcomes are achieved. The prescribed criteria can be determined by the grantor to most closely align with his or her core values. For example, one grantor may value education above all else, another may value philanthropy, still another may value both. The following are some of the most common types of provisions a grantor may consider to encourage “good habits” in intended beneficiaries:

Education

  • Schedule distributions upon completion of each degree, with the value determined by the level of degree;
  • Allow for a scheduled distribution or a monthly stipend if a certain grade point average is maintained for a full time student;
  • Give the trustee discretion to cease or withhold educational or other payments if the beneficiary is not performing well academically;
  • Provide rewards beyond the regularly scheduled amount when good grades are achieved;

Marriage or Family

  • Allow for a scheduled distribution when a beneficiary marries, and give the trustee discretion to allow for continuous distributions as a reward for beneficiaries who stay married;
  • Incentivize a parent to be able to stay at home and raise children, given that leaving work would not be a financial disincentive for the family;
  • Allow for payments toward a wedding, either outright or by matching the beneficiary’s contribution;
  • Where a beneficiary is caring for family members full time, such as children or a disabled or elderly relative, and where the beneficiary’s spouse is employed full time or unable to work because of a prescribed reason such as a medical condition, consider providing the beneficiary with supplemental income support.

Income and Employment

  • Provide trust distributions in accordance with an amount the beneficiary saves on his or her own, or the income, wages, or tips the beneficiary earns, either as a percentage or “dollar for dollar” match, up to a stated amount;
  • Reward the beneficiary with extra trust distributions for choosing a profession preferred by the grantor, or taking over a family business;
  • Enable a beneficiary to start his or her own business or invest in a business by making outright contributions, contributions based on business performance, or matching contributions made by the beneficiary;
  • Enable a beneficiary to enter a profession in public service or charity by providing supplemental income.

Philanthropy

  • Match contributions that a beneficiary makes to charitable organization;
  • Provide compensation or reimbursement to a beneficiary who substantially contributes his or her time to charitable efforts, or match income of a beneficiary employed in public service or charity;
  • Require engagement with a specified charity or charitable cause in order to receive a trust distribution;
  • Provide extra distributions to reward philanthropic accomplishments;
  • Provide for an annual charitable gift and require beneficiaries to decide together to which charity or charitable cause the funds will be provided.

Moral Behavior

  • Give the trustee discretion to cease or withhold payments to a beneficiary who is convicted of a crime, engages in illegal activity, or consistently violates the law;
  • Give the trustee discretion to cease or withhold payments to a beneficiary who uses or abuses drugs, alcohol, tobacco, or engages in other vices or compulsive behaviors (e.g. gambling);
  • Give the trustee discretion to require a drug test from a beneficiary who is suspected to be engaging in that type of activity before making a distribution;
  • Reward good moral behavior such as an extra annual payment to those beneficiaries who do not have a driving violation or traffic accident.

Though these are examples of more common incentive provisions, the options are nearly endless. If you would like to learn more about encouraging “good habits” in your intended beneficiaries through incentive trust clauses, contact Mammel Law at 248-644-6326.

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