The limits of an incentive trust

On Behalf of | Oct 12, 2022 | Trust Contests

Trusts are created for all kinds of reasons, and their grantors sometimes have very specific ideas about what makes someone worthy to benefit from those assets. This is where incentive trusts come into play.

Incentive trusts are designed to exert a bit of “dead-hand control” over the future by setting conditions on what an heir must do (or not do) in order to receive a payout. Sometimes this is framed as a “carrot-and-stick” approach.

The “carrot” isn’t usually a problem

When a trust’s conditions encourage beneficiaries to make good choices or be on their best behavior – or simply reward them for successfully completing certain milestones, that’s not usually a problem.

For example, a grantor may decide to reward their grandchildren with a hefty payout for things like graduating high school, graduating college or waiting until they’re 25 before they marry. It can also include morality clauses that only pay out if a beneficiary abstains from smoking or drinking or illicit drug use before they’re 21 years of age.

Generally speaking, trusts with these kinds of conditions are fine (although some can run into problems if they’re too restrictive).

The “stick” approach can lead to litigation

But what if a trust seeks to take away a beneficiary’s rights or is simply punitive in some way?

A trust can never require a beneficiary to do something illegal in order to obtain the benefits, nor may it push the beneficiary to act in a way that’s contrary to public policy. Trusts also cannot be used to totally deny someone their fundamental rights and freedoms.

For example, a trust could be written in such a way that it only pays out if a beneficiary marries within the family’s faith – but it cannot deny a beneficiary the right to marry at all. Similarly, a trust could not require a beneficiary to divorce the spouse that their grandmother hated before they get any of the trust’s assets since that would fly in the face of public policy.

If you’re subjected to a trust that seems unduly restrictive, unreasonable or unethical, it may be time to explore all of your legal options. Trusts can be broken under certain conditions.



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