When the trustee likes what a beneficiary is doing, they’ll give bigger distributions. They’ll reduce or hold back distributions when they don’t like what they see.
Bribery is the word that comes to my mind. One colleague goes so far as to call it extortion.
Here are some classic incentive trust provisions:
“The trustee will pay you 50 cents for every dollar you earn.” (So what if you’re a teacher doing good work but not making much money? So what if you’ve decided to leave the workplace and serve as a caregiver for an ailing family member?)
“When you get your bachelor’s degree, the trustee will pay you $25,000.” (So what if you’re a talented chef and chose to pursue that instead?)
“Every time you have a child, the trustee will pay you $25,000.” (So what if your brother and his wife can’t have kids? They get the short end of the stick here.)
These incentives can discourage a beneficiary’s personal interests by setting the example that life is only measured by having or getting more money.
The chef might take a more traditional path even though they’re good enough for a spotlight on Chef’s Table.
The teacher may feel judged by provisions that ignore work that society needs but undervalues.
The excellent student might decide that their natural curiosity has been hijacked and turned into a job. Their curiosity takes the hit.
Stanford psychology professors have spent three decades studying how externally imposed rewards can wreck an internal interest that already values the subject of the reward.
A school of wealth psychologists worries that intellectual and emotional pleasure diminishes when you find yourself on a treadmill someone else put you on – even if the treadmill encourages you do keep doing something you like.
I’m not saying incentive trusts are bad.
I’m not saying they don’t work.
They need to be implemented thoughtfully so they don’t backfire.
How about structuring an incentive trust that rewards contributions to art, science, culture, and education? It can be done – especially if you help a client figure out what things they value most in the world.
I’m pretty sure the answer will (almost) never be “I want my kids to measure their lives using money.”