If the goal is to encourage education or earning a living, how will less gifted children be treated? Should the trustee provide support so that the student can participate in unpaid internships? Will the student have to meet performance standards to continue receiving support? How will the trustee prevent future beneficiaries from manipulating the system? Without some forethought, you might create a professional student who has no incentive to actually go out and get a job.

One way to prevent future generations from wasting their inheritance is to allow them to make small mistakes while they are learning to become financially mature. Consider distributions of principal at various ages so that the trustee can observe how the beneficiary handles money. It is not unusual for young heirs to regret foolish expenditures or decisions. By the time the next distribution of principal is due, they may have learned from their mistakes and be ready to handle greater portions of their inheritance.

A key to a successful incentive trust is an impartial trustee who cannot be controlled by the beneficiaries. Corporate trustees such as banks can detach themselves from emotional blackmailers who might unduly influence a family trustee.

Protecting The Trust For The Future
An incentive trust may last for several generations, and, ideally, the trust document should be written broadly enough to deal with unforeseen circumstances. Recognize that what is appropriate today may not apply tomorrow. One way to deal with the changing family dynamic is to name a trust protector who can change the trust guidelines to meet future or unanticipated needs. A trust protector or
advisor can be a senior family member or family friend who can provide insight about a beneficiary's needs or problems. Alternately, the grantor can provide for a board of several trustees or an advisory council who has the power to amend the trust. Including one trustee elected by the beneficiaries may avoid a future court battle by heirs looking to break the trust.

Lastly, it is important that the grantor communicate his or her personal goals and provide written guidance that the future trustee can rely on. This might be in the form of letter to the trustee that expresses what is important to the grantor and how he or she feels about issues the trustee might encounter. The incentive trust is the grantor's legacy, and it should be a positive message to the next generation that will inspire them to make the best use of the wealth that is given to them.

Tere D'Amato is the director of advanced planning at Commonwealth Financial Network in Waltham, Mass. She can be reached at [email protected].