Today, families are trying to fight that deadening of talent with incentive trusts that aim to ensure the next generation doesn’t become a pack of trust-fund slackers.

A trust with strings attached is referred to as an incentive trust. These types of trusts impose specific, objective conditions for distributions, and leave little room for discretion by the trustee. A recent article in Barron’s,titled “Incentive Trusts Can Keep Your Heirs Motivated,” examines all manners of restriction or condition placed on trust funds. Common examples include: requiring that the trust’s beneficiaries graduate from college before receiving any money; rewarding beneficiaries who do charitable work; or boosting the incomes of those who choose low-paid, yet meaningful careers. Some incentive trusts penalize beneficiaries who don’t get work and cut off (or decrease) distributions, and some may place restrictions on heirs with substance addictions by requiring that payments go directly to rehab centers.

Consider a clause that cuts off payments to beneficiaries who use drugs. Sounds noble, but it can be an giant headache, the article says. If the trust requires that all beneficiaries get drug tested regularly, it could find itself with medical-privacy issues. Instead, the article suggests that grantors set out their wishes but leave more discretion to the trustee.

The Barron’s article emphasizes that careful drafting is critical when using an incentive trust. Everything should be set out in the trust clearly. For example, the article recommends that an employment-related incentive trust define “earned income” and at what age the employment requirement disappears. In an education-related incentive trust, speak to the issue of whether the trust is to pay more for a more expensive school. And what if a chosen career doesn’t require schooling? The article says, more broadly, how do you ensure that you are motivating the right behavior — and not just maintaining control over future generations to their detriment?

Trying to impose many requirements, such as including becoming a registered member of a particular political party; or requiring beneficiaries to marry within the family’s religious or ethnic background, or-as the article says-encouraging a beneficiary to divorce, are not popular with the courts. Leave room for changed circumstances and unintended consequences, too.

The article advises to make the incentives nonbinding and to exercise great care in the selection of a trustee. Once the trustee is appointed let the trustee make the final call, the article advises. For more information on this type of trust, speak to your estate planning attorney. He or she can help you design a trust that works for both you and the intended beneficiary.

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