[] [] [prev-tail] [tail] [up]

Incentive Trusts

Incentive trusts attempt to govern from the grave by conditioning distributions on specific academic, career, or behavioral benchmarks. Instead of handing a young beneficiary a lump sum that might fund a life of leisure, you dictate the terms on which capital is released.

Common incentive structures include:

Educational Milestones

Conditioning payouts on graduating from an accredited university with a minimum GPA (e.g., 3.0) or earning a graduate degree.

Employment Matching

Distributing one dollar for every dollar the beneficiary earns, as verified by federal tax returns (Form W-2 or Schedule C).

Behavioral Sobriety

Mandating random, hair-follicle drug tests administered by an independent third party before any discretionary distributions are made.

While appealing if you are concerned about wealth spoiling heirs, these trusts carry substantial legal and practical risks. First, conditions cannot violate public policy. Provisions that encourage divorce, restrict marriage, or mandate a specific religious conversion are void under the Restatement (Third) of Trusts. Second, rigid formulas often misfire. A dollar-for-dollar matching clause severely penalizes a beneficiary who chooses a career in public education, starts a struggling non-profit, or suffers a debilitating medical event.

To prevent these unintended consequences, avoid rigid mathematical formulas. Instead, grant the trustee broad discretionary power under a Health, Education, Maintenance, and Support (HEMS) standard, supplemented by a detailed, non-binding Letter of Wishes. This allows the trustee to evaluate the beneficiary’s holistic circumstances while honoring your intent.

Spendthrift Trusts

Put a spendthrift clause in every trust you create for someone else. It costs nothing, it is a single paragraph, and it is the difference between your grandchild inheriting and your grandchild’s ex-spouse’s attorney inheriting. The clause bars the beneficiary from selling, pledging, or assigning their interest, which means they cannot borrow against the inheritance you have not given them yet—and, critically, their creditors cannot attach the trust corpus before it is distributed. A creditor can garnish what reaches the beneficiary’s hands; the clause stops them reaching back into the trust.

Understand what it does not do. It protects the beneficiary, not you: a spendthrift clause in your own self-settled trust is worthless outside a DAPT state (section “Domestic Asset Protection Trusts (DAPTs)”). And in California the protection has holes worth knowing before you rely on it ( Cal. Prob. Code §15300):

Notice the shape of those exceptions: they exist for creditors the legislature decided deserve priority—an ex-spouse, a child, the state itself—and no drafting defeats them. Plan for them instead of around them.

Two drafting moves make the clause materially stronger, and neither is exotic. First, pair the spendthrift language with fully discretionary distributions: if the beneficiary has no right to demand anything, a creditor standing in their shoes has nothing to demand either, which is strictly better protection than a mandatory income interest wrapped in a spendthrift clause. Second, if a beneficiary is already in trouble—a judgment, a bankruptcy, a divorce—tell the trustee to stop distributing and let the assets sit. Distributed money is exposed money, and a trustee with discretion is entitled to wait until the storm passes. Where a beneficiary’s exposure is a permanent feature, not a bad year, choose a situs whose exception creditors are narrower than California’s (section “Top U.S. States for Trusts: Tax Benefits and Flexibility”) and give the trust a corporate trustee who will actually say no.

[] [] [prev-tail] [front] [up]