What Is an Incentive Trust?

An incentive trust is designed to encourage or discourage certain behaviors by your beneficiaries by distributing trust income or principal as an incentive. The trustee will only give your beneficiaries funds from the trust when they do what you’ve specified. Or specific actions could disqualify a beneficiary for receiving funds or lower the amount they receive. You can think of it as trying to control your beneficiaries’ behavior even after you have passed away.

An Example of an Incentive Trust

Maurice Laboz, a New York City real estate mogul, died in 2015 at the age of 77. He had done an incentive trust for his daughters Marlena (age 21) and Victoria (age 17). Each of them would inherit $10 million when they turn 35.

The incentive trust allows the daughters to inherit some money earlier.

  • Marlena will get $500K when she marries if her husband signs a prenuptial agreement saying he won’t touch Marlena’s money.
  • Marlena will get $750K if she graduates from an “accredited university” and writes a description (100 words or less) about “what she will do with the funds.” The trustees must approve the essay.
  • Beginning in 2020, each daughter will annually receive three times the income on their personal federal tax return.

If the daughters choose to have children instead of being employed, they’ll get 3% of the value of the trust each year as long as the child is born in wedlock. They could earn also earn that amount by being “a caregiver” to their mother. (Their mom was in the process of divorcing their father and was left nothing based on a prenuptial agreement.)

It’s important to make sure that the incentive trust is set up in a way that the state law permits. Some states have rules about what acts a trust can’t make payouts contingent on. Also, the terms must be designed properly to ensure that it works the way the it was intended to.

Contact The Heritage Law Center Today

We don’t advise being as creative as Laboz was with his incentive trust, but it’s a very clear example of the control an incentive trust can have. As an experienced Massachusetts estate planning attorney, I can help you create an estate plan that meets your specific goals. You can set up a free consultation with us today by calling us at 617.299 6976 or sending an email to info@maheritagelawcenter.com.