Probate & Trust Law Section Conference Manual ... - Minnesota CLE

D. Incentive Trusts
1. Encouraging Thrift and Hard Work. Many clients worry about leaving
“too much” to their children. They feel good about being able to provide
for their beneficiaries, but they do not like the idea of creating “idle rich”
within their family. As with most drafting tasks, creating a trust provision
that motivates good behavior is subject to the tension between the desire to
avoid disputes and to provide clear guidance to the trustee, and the desire
to give the trustee flexibility to address changing circumstances. The
following examples illustrate this:
Certain
On or before January 31 of each year, the Trustee shall
pay to my daughter, Mary, from income, and to the
extent income is insufficient, from principal, an amount
equal to Mary’s earned income for the immediately
preceding year, as evidenced by W-2 forms or other
documentation acceptable to the Trustee.
The amount distributable from this trust is
fairly easy to determine, and the beneficiary
will not have the opportunity to live a lavish
lifestyle without working.
The trust provides the beneficiary with a
significant incentive to work hard – her earned
income will be doubled each year.
On the other hand, this discourages the
beneficiary from working in a profession that
does not pay well, from taking time from work
to care for children, etc.
Flexible
The Trustee shall pay to my daughter, Mary, such
amounts from principal or income as the Trustee in its
sole discretion shall from time to time deem
appropriate. Because I believe that the greatest rewards
in life come from having a sense of achievement, it is
my hope that the resources of the trust be viewed and
used primarily to provide Mary with the opportunity to
achieve her full potential rather than as a fund that
permits her to maintain a high lifestyle with only a
limited effort on her part. I request that the Trustee
administer this trust accordingly but recognize that the
Trustee must ultimately have the flexibility to determine
the appropriate amount of distributions in the future.
This gives the Trustee discretion to withhold
distributions if the beneficiary does not need or
want them, and also to make distributions
when the beneficiary is not earning income for
reasons unrelated to the beneficiary’s desire to
“live off the trust.”
As with all flexible provisions, it also creates
the greatest risk that the trustee will distribute
more or less than the testator would have
wanted and creates a greater risk of
disagreement and litigation.
This provision has the perverse result of
requiring large distributions in years when the
beneficiary needs them least, and of
eliminating distributions in years when the
beneficiary may need them most.
At a minimum, the provision should address
Mary’s disability.
2. Discouraging Bad Behavior. While motivating a beneficiary to become a
productive member of society is a good thing, many clients are equally
concerned (or more concerned) about avoiding bad behavior on the part of
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