Is a trust able to monitor your family’s values? Maybe, maybe not, but there is currently a new trend among wealthy individuals to establish "family incentive trusts" for other family members, with the aim of fostering responsibility and social consciousness among their offspring.

What Is an Incentive Trust?

Incentive trusts are not new but have recently become more popular. These irrevocable trusts typically include a series of goals or accomplishments that a child or young adult must achieve before benefiting from his or her family’s wealth. These identified goals and the resulting trust benefits are often based on academic, financial, professional or philanthropic accomplishments that are to be achieved by the young person over time.

For example, an incentive trust may require that the trust’s beneficiary receive funds only after graduating from college with a certain grade point average. Or the trust may be set up to distribute funds as part of a matching formula based on earnings from employment. The trust could stipulate that no funds are to be paid from the trust if the young person is involved in drugs or other illegal activities. Other requirements might include community activity or involvement with certain charitable organizations. Some family incentive trusts even require that the beneficiary be devoted to raising a family.

What the Critics Say

Critics of family incentive trusts suggest that this is a way for wealthy individuals to "rule from the grave" or to improperly "bribe" children into a certain mode of behavior or lifestyle.

Despite the criticisms, family incentive trusts are flourishing among high-net-worth individuals. When carefully written and disclosed to family members, this kind of trust can provide an incentive for children to live goal-oriented, productive lives. However, it is important that the trust document be carefully set up to include broad language that covers emergencies as well as legitimate mistakes a young person may make.

Choosing a Trustee Is Important

Selecting a trustee is an important decision in setting up any trust. You may choose a family member or close friend as trustee, but this person might not be objective or could be too removed from family decision-making to see that the trust’s required goals are met. An impartial, experienced professional trustee can make the most sense to help ensure that provisions drawn up in the trust document are strictly carried out.

Your financial advisor can provide more information about family incentive and other types of trusts and help you decide which strategies may work best for your individual needs and goals. Be sure to consult your tax and legal advisors, though, before making any tax or legally related investment decisions.

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