Definition
In American estate planning parlance, an incentive trust is a trust designed to encourage or discourage certain behaviors by using distributions of trust income or principal as an incentive. A typical incentive trust might encourage a beneficiary to complete a degree, enter a profession, or abstain from harmful conduct such as substance abuse. The beneficiary might be paid a certain amount of money from the trust upon graduating from college, or the trust might pay a dollar of income from the trust for every dollar the beneficiary earns.
Incentive Trust
What is ‘Incentive Trust’
A legally binding fiduciary relationship in which the trustee holds and manages the assets contributed to the trust by the grantor. In an incentive trust arrangement, the trustee must adhere to specific requirements set out by the grantor regarding what conditions the trust’s beneficiaries must meet in order to receive funds from the trust.
Explaining ‘Incentive Trust’
An incentive trust operates as a sort of “conditional inheritance” for beneficiaries named in the trust. For example, say an aging investor wants to leave a certain proportion of her wealth to a grandchild, but she also wants to ensure that the inheritance money does not lessen the grandchild’s drive to pursue a professional career or a higher education. By leaving the inheritance funds to the grandchild in an incentive trust, the grantor can specify that the funds are to be dispersed only once the grandchild has obtained an undergraduate degree, for example (or any other legally permissible requirements the grantor may wish to set out).
Further Reading
- Effects of financial incentives on the breakdown of mutual trust – journals.sagepub.com [PDF]
- I trust you, I trust you not: a longitudinal study of control mechanisms in incentive contracts – www.tandfonline.com [PDF]
- Collaboration in public construction—contractual incentives, partnering schemes and trust – www.tandfonline.com [PDF]
- An investigation of consumer-perceived risk on electronic commerce transactions: The role of institutional trust and economic incentive in a social exchange … – aisel.aisnet.org [PDF]
- Managerial incentives: implications for the financial performance of real estate investment trusts – onlinelibrary.wiley.com [PDF]
- Trust and incentives in principal-agent negotiations: The 'insurance/incentive trade-off' – journals.sagepub.com [PDF]
- Public trust, the law, and financial investment – www.sciencedirect.com [PDF]
- “Not just for the money?” How financial incentives affect the number of publications at Danish research institutions – www.tandfonline.com [PDF]
- The governance of CEO incentives in English NHS hospital trusts – onlinelibrary.wiley.com [PDF]
