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The Carrot Mightier than the Stick – Using Incentives in Your Trust

Frequently people approach estate planning with their most challenging child in mind.  This is a natural and integral approach to constructing estate planning documents.  It allows parents to consider and approve planning that is directed toward their specific circumstances and goals.  However, it is important to remember that many times a positive motivator (i.e. a carrot) can succeed where a condition (i.e. a stick) may fail.

Trusts exist as a set of rules for how assets are to be managed and distributed among beneficiaries.  Accordingly, the very nature of trusts require that they have conditions governing when distributions can and should be made.  The challenge is avoid the natural inclination toward using a condition to plan for a potential problem when an incentive may be the better alternative.

For example, many parents are concerned with their children obtaining a college degree, staying off of drugs or avoiding teen pregnancy.  A common approach is to withhold distributions if the beneficiary fails in any one of these areas.  In fairness, this may be the best approach to motivating a beneficiary toward the desired results.  However, it may also have some unintended negative consequences.  A child that wants to wield or fix cars for a living may expend tens of thousands of dollars to earn a college degree s/he never intends to use just to qualify for distributions.  Likewise, a child with a drug problem may delay seeking assistance for fear of losing their trust distributions.

By contrast, the trust could provide various levels of incentives for different variations of educational success.  A trust provision could be drafted to modify distributions to cover the costs of beneficiaries that are attend a rehabilitative facility.  A provision could be drafted to provide a yearly gift to a beneficiary for attending educational events or joining groups that combat teenage pregnancy.

In short, a well-designed trust should generally be a mix of condition and incentive because most beneficiaries are not entirely motivated by either stick or carrot.  Generally, a well thought out use of all tools that is tailored toward the beneficiary (or beneficiaries) that we seek to motivate is the most successful plan.

Royce Lanning

Phone: 281-367-1222

Fax: 281-210-1361

[email protected]

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