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What should you know about incentive trusts?

You may have heard of incentive or conditional trusts. They are typically established by people as part of their estate plan to motivate beneficiaries (often adult children) to do things like finish college, maintain a job, participate in charitable organizations or remain sober.

The beneficiaries will receive proceeds from the trust only if they meet these preset conditions. The trustee appointed to oversee the trust is the one tasked with ensuring that the beneficiary fulfills the conditions before dispensing funds to them. Conditional provisions can be included in a will to accomplish the same ends, with an executor overseeing them.

Many people establish conditions with the best interests of their loved ones in mind. They want to make sure the funds aren’t spent in ways that are wasteful or even harmful. They may see it as a way to continue to parent even after they’re gone or help ensure that the family name continues to be associated with hard work and contributions to the greater good. However, they’re known by some as “dead-hand control.”

What conditions are not allowed?

The law allows incentive trusts and conditional provisions — with some caveats. The conditions are unenforceable if they violate public policy. That’s a rather vague phrase. Here are some examples of conditions that are considered unenforceable:

  • Dictating whom a person can or cannot marry (or whether a person marries at all): A grantor can’t require a person to marry (or prevent them from marrying) someone of a particular race, religion or gender, for example
  • Requiring the beneficiary to get a divorce or do anything else that would promote family strife
  • Dictating what religion a person must follow (or is forbidden from following): That’s considered a violation of their constitutional right to freedom of religions
  • Requiring a beneficiary to destroy property (like something the decedent doesn’t want anyone to find) or do anything that is illegal

Conditional trusts and will provisions can be difficult for executors and trustees to monitor. There are also a lot of ways for beneficiaries to get around them. Sometimes all they do is create conflict or estrangement between the heir who is subject to the conditions and other members of the family. If you’re considering placing conditions for one or more of your heirs and beneficiaries, it’s wise to discuss those conditions and your reasons for including them with your estate planning attorney.