What Is an Incentive Trust?

An incentive trust is a type of trust fund that provides support for beneficiaries in exchange for those beneficiaries complying with specific conditions put in place by the trust grantor. With this type of arrangement, the trustee of the fund will disburse funds to beneficiaries as long as they honor the wishes of the grantor. Should the beneficiary choose to not comply with those wishes, the support is terminated and the assets held in check for the care of the beneficiary are reallocated to other beneficiaries.

Sometimes known as a conditional trust, an incentive trust is designed to motivate beneficiaries to pursue specific goals or activities that the grantor considered to be in their best interests. The idea is to make sure that the inheritance from the trust does not limit or impede the beneficiary in the pursuit of those goals or activities. For example, a parent may set up an incentive trust for a child providing monthly disbursements for living expenses, with the provision that the child pursue and successfully complete a degree program at a university. In order to aid in the pursuit of the goal, the parent may also authorize the trustee to disburse funds from the trust to help with education expenses. If the child completes the degree and complies with the wishes of the grantor, the monthly disbursements continue, and may possibly provide additional financial support for other matters, such as providing a down payment on a home.

The goal of an incentive trust is to provide for loved ones in a way that still motivates them to engage in activities that the grantor believes will provide them with the greatest degree of happiness and fulfillment. A wide range of provisions may be included in this type of trust arrangement. The plan may call for the beneficiary to be married by a certain age, pursue a specific type of career, or even stipulate that the beneficiary will receive financial support as long as he or she takes care of a sibling or other relative with special needs. As long as the provisions are not prohibited by law, it is possible to place just about any type of conditions on the receipt of funds from an incentive trust.

The scope of powers assigned to the trustee or fund administrator of an incentive trust must be in line with the provisions placed on the beneficiaries. For example, if financial support for the beneficiary is predicated on pursuing a college education, the trustee must have the authorization to disburse the funds needed to pay college tuition and fees. In order to ensure that both the provisions governing support for beneficiaries and the scope of powers granted to the trustee are in sync, working with an attorney well versed in the establishment of trust funds will make it easier to design the trust and its provisions effectively, enhancing the changes for the grantor’s wishes to be honored.