The Problem With Incentive Trusts

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The concept of an incentive trust is not particularly new. The idea is simple: the person creating the trust ties distributions to certain desired behaviors. These behaviors can include completing college, earning a sufficient income, getting married, etc. On its face, there is some attractive qualities to this approach. After all, parents like to see their kids achieving admirable things.

Unfortunately, this carrot and stick approach is often ineffective at impacting character — and sometimes can even negatively impact a beneficiary’s self-sufficiency, sense of responsibility or even their motivation to achieve to their capabilities. While incentives impact behaviors, the message that often comes across to beneficiaries is that they can’t be trusted to make good choices on their own. Consequently, incentive trusts have a minimizing effect (at least to adult beneficiaries) that may lead to extended financial dependency and immaturity.

While there may be a place for incentive trusts, understand that behavior is not what most individuals or couples would thoughtfully have as their primary planning goal. Rather, a more typical goal would be for the subject beneficiary to develop into the kind of person that would naturally make positive choices regarding family, finances and personal growth. The experience of positive behaviors through incentives is a type of fool’s gold that is easier to obtain, measure and draft for — but like fool’s gold, will have little worth when considered against the backdrop of the true, underlying goals.

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Mark initiated this blog due to his passion in assisting and equipping families to manage their wealth and their families well.

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