Leona Helmsley infamously left $12 million in trust to her dog while completely cutting out two of her four grandchildren from her fortune. The two grandchildren who received bequests could only receive their payouts if they visited their father’s grave at least once a year, which they had to prove by signing a register kept at the Helmsley Mausoleum. This was Leona’s way of “encouraging” her grandchildren to do something that they might not want to do otherwise – by tying it to their inheritance.

“Incentive trusts” have received a great deal of attention in recent years as a creative way to encourage desirable behavior from trust beneficiaries by tying distributions to the requirement that beneficiaries attain certain goals. Because the binding provisions of incentive trusts can have unintended consequences, clients are generally advised to use non-binding (precatory) trusts to achieve their objectives.

The main disadvantage of incentive trusts is that they often include potentially unclear, binding goals or benchmarks, which can lead to disputes and even to costly litigation. For example, parties may disagree as to whether or not “graduation from college” includes graduation from a 2-year community college. Another disadvantage of incentive trusts is that they may result in unintended consequences. For example, a trust that requires matching salary distributions may discourage a beneficiary from pursuing a career that is personally or socially rewarding – such as that of artist or social worker – but may provide lower salaries, as it would result in lower matching salary distributions from the incentive trust.

In contrast, precatory trusts provide non-binding guidance to the Trustee that does not mandate a course of action. These precatory trusts can be customized to convey a client’s specific goals for future generations and adjusted to the changing needs of beneficiaries. For example, a precatory trust may be drafted so that distributions focus generally on living and educational expenses until the beneficiary reaches age 25; and on the beneficiary’s efforts to acquire a home or establish a business when the beneficiary is between the ages of 25 and 35.

In addition, precatory trusts have other potential benefits, such as increased creditor protection. Precatory trusts inherently have less potential for conflicts than do incentive trusts, since generalized distribution guidance provides more flexibility for the Trustee to tailor trust distributions to a beneficiary’s unique circumstances, rather than requiring that mandatory goals be met.

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Photo of Carmen Irizarry-Diaz Carmen Irizarry-Diaz

Carmen Irizarry-Díaz assists U.S. and international private clients in accomplishing their personal goals for legacy planning and charitable giving. Her practice encompasses all aspects of tax and charitable planning and related instruments and structures – including charitable foundations and trusts – the administration…

Carmen Irizarry-Díaz assists U.S. and international private clients in accomplishing their personal goals for legacy planning and charitable giving. Her practice encompasses all aspects of tax and charitable planning and related instruments and structures – including charitable foundations and trusts – the administration of trusts and estates, and related tax reporting and compliance, including the representation of clients and estates in intra-family controversies as well as before the Internal Revenue Service and other tax authorities. Carmen’s client base includes corporate executives, philanthropists, professionals, families with complex issues (including children with special needs), charitable entities, fiduciaries, and business owners – whom she also counsels on the efficient lifetime and death transfer, restructuring, and succession planning of their business interests, including sales, ESOPs, and other exit strategies. Carmen also advises accounting professionals on the reporting of transactions and compliance with adequate disclosure requirements.

Carmen is an empathetic listener who endeavors to understand her clients’ singular perspectives to best design their legacy plan and further their goals for preserving family harmony, providing incentives for social responsibility and positive values, and addressing the financial and philanthropic education of their legacy recipients. Carmen’s high standards of commitment to her clients and years of experience enable her to pinpoint core issues, create alternative and innovative courses of action, and identify the best strategies and opportunities while simplifying complexity, identifying efficiencies, and motivating others to take action, all in a client-centric, collaborative, and tax-conscious manner.

Carmen is a Martindale Hubbell AV® Preeminent (5 out of 5) rated tax attorney for ethical standards and professional ability in the areas of legal knowledge, analytical capabilities, judgment, communication, and legal experience, based on evaluations by other attorneys and the judiciary in the United States.