Trusts are used for beneficiaries who may lack the ability, judgment, prudence or discretion to handle money wisely. Typically, trusts are established in Wills for the benefit of minors or created during lifetime and funded with assets, one or more life insurance policies, or a combination of both. However, many clients feel that even when their beneficiaries become adults at age 18, they still may be too young to have unrestricted control over assets.

Very wealthy clients are setting up trusts for more than one generation. Due to recent changes in Louisiana trust laws, these trusts can be established for unlimited descendants, such as children, grandchildren, great-grandchildren, great-great grandchildren, and future generations even if there are no grandchildren in being at the time the trust is created. These trusts are commonly known as "perpetual" or "dynasty" trusts.

You have great flexibility in tailoring a trust to your wishes, desires and personal values. You are not limited merely to the selection of the ages when the trust will terminate, if and when mandatory distributions will be made to the beneficiaries or whether the Trustee's investment authority should be restricted in some manner. When it comes to flexibility in distribution determinations, most trusts simply provide that "distributions shall be made at such times and in such amounts as the Trustee determines in the Trustee's sole discretion" or "distributions shall be made in the Trustee's discretion for the support, maintenance, education and medical needs of the beneficiary." You should take the time necessary to consider and communicate your expectations, hopes and desires for the beneficiaries and how the assets in the trust will or should impact upon those expectations so that the trust distribution provisions can be tailored properly.

"Incentive" trusts allow you to link trust distributions to desired goals and to encourage certain behavior in the beneficiaries. Quite a few clients are concerned about the destructive effects of "affluenza" on the beneficiaries. They want to pass on the work ethic that created their own wealth and insure that the funds from the trust will not discourage the beneficiary from becoming a productive member of society. Warren Buffett characterized the perfect inheritance for children as "enough money so that they feel they could do anything, but not so much that they feel they could no nothing." Incentive trusts are not limited to the very wealthy. It is common for many clients with only moderate estates to set up life insurance trusts which will be worth more than $1 million at death.

One common incentive provision is to encourage college education. However, a simple provision that the Trustee should pay the beneficiary's college and graduate, professional or technical educational expenses may not meet your expectations. Should distributions be tied to the beneficiary's maintenance of a minimum grade point average? Should distributions be limited to a specific number of years of college and/or post-graduate education to discourage the "perpetual" student? Should educational expenses be limited to tuition, books, room and board, or should it include other items such as transportation, living expenses, computers, software, etc.? What about special educational needs of disabled beneficiaries?

Another common incentive provision is to provide matching trust distributions based upon the beneficiary's gross earnings from full-time employment. For example, the trust could distribute to the beneficiary $1 for each $2 of gross earnings from full-time employment or self-employment. Generally, clients will want to cap the dollar amount so as not to deplete the trust fund in favor of a beneficiary who has unusually large earnings and probably really does not need the distributions for financial support. On the other hand, the beneficiary could be rewarded with distributions even though not particularly productive in a monetary sense but nevertheless in a societal sense. For example, you may feel a beneficiary who is an artist, writer, social worker, teacher or missionary deserves incentive distributions. A beneficiary may deserve distributions even though not earning a living because the beneficiary is so disabled that he or she cannot be gainfully employed or because the beneficiary has given up work to care for a family member, such as aging parents, minor children or a terminally-ill spouse. Alternatively, you may want the trust to make a periodic specific allocation to any beneficiary judged by the Trustee to have made the most significant contribution to society or in a specified field.

Incentive trusts also can be designed to discourage certain behavior by limiting distributions to beneficiaries who engage in conduct deemed undesirable by the client. Some examples include self-destructive behavior, such as alcohol or substance abuse, engaging in criminal conduct, divorce, marrying outside of religious faith, failure to complete education, sloth, etc.

Before you set up trusts, you should have a candid discussion with your attorney about designing the distribution standards in accordance with your own philosophy. This is particularly important where you really do not know the beneficiaries, such as yet-to-be born beneficiaries or minor beneficiaries. Be sure that you communicate those decisions to the attorney who drafts your trust.

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