Incentive trusts are intendedto simplify trust administration by mandating distributions only upon certain events, imposing clear-cut rules in the otherwise gray area of trustee discretion. More importantly, incentive trusts attempt to encourage (or discourage) certain behaviors by making distributions dependent on certain benchmarks or accomplishments.

For example, an incentive trust may provide that distributions are made or withheld based upon: educational benchmarks, such as enrollment in or graduation from college or graduate school programs or a certain grade point average; professional employment, such as employment status, salary, number of years being gainfully employed or the social value of the employment; marital status or number of children; or a beneficiary's own charitable contributions.

While the intent behind incentive trusts is laudable, hardwiring a trust in this manner has endless pitfalls. Consider the effect of traditional educational benchmarks on a child who, because of disabilities or different capabilities, doesn't flourish or fit in a conventional educational program or is unable to maintain the required grades. Such a child may actually need more assistance from the trust, but will receive less for failing to obtain the required degree.

What if the beneficiary wants to enter a trade or vocation, such as plumbing or carpentry, that does not require a typical college education? Should he be penalized for his choice by withholding a distribution?

Employment benchmarks are perhaps the most cumbersome. Dollar-for-dollar, earned matching distributions reward lucrative careers more than socially valuable or personally rewarding careers (not to mention volunteer activities), when the child who earns less could use the funds much more. Further, attempts to include the social utility of a profession in the calculation of a trust distribution invites conflict and litigation. Such provisions may be unfair to a beneficiary with mental or physical disabilities or special needs if the beneficiary is unable to obtain employment that is as lucrative or deemed as socially valuable as other beneficiaries.

A trust agreement with employment benchmarks also needs to provide exceptions for those times when employment is no longer possible or appropriate. What if a beneficiary loses his job and is unexpectedly unemployed? Trust distributions would be even more important during such time. Or, the settlor (the creator of the trust) may want to provide for a beneficiary who would like stay at home to raise children or retire after years of work. How will distributions be calculated in either of these cases?

What about the trust's definition of the income to be matched? Matching unearned income (e.g., gains, dividends and interest from investments) provides an incentive to save, but could allow a wealthy child to reap huge rewards without ever working.

Mandatory matching distributions to a beneficiary who may not need, or even want, such distributions exposes such property to creditors' claims and generation-skipping tax, and could deplete a trust earlier than the settlor would have hoped.

All of these exceptions and possibilities make drafting an incentive trust unwieldy and defeat the intended simplicity. Even an incentive trust that covers every contingency still may not achieve its intended purposes. The trust's benchmarks are the tools used to encourage trust beneficiaries to develop into well-rounded and productive members of society in line with the settlor's principles and values. But those benchmarks may not in fact be the best or only evidence that such a goal has been achieved. Consider the income-matching provisions used out of fear that beneficiaries will be unproductive or unmotivated.

Such an incentive trust rewards the beneficiary who obtains an education and a high-paying job. But what about the beneficiary who is a stay-at-home mom with children of her own and a foster child? Let's say she also serves on charity boards and volunteers for the local school board. Is that to be discouraged? This illustrates the problem with trying to write a trust that, for decades to come, attempts to encourage broad behaviors measured by specific activities and events.

Because of these difficulties, "principle trusts" are better because the terms offer guidance as to the settlor's values and principles instead of hard and fast rules. Principle trusts leave it to the trustee to determine how to make distributions that support the settlor's values and principles. The trustee is able to consider the big picture-the personality, talents, abilities and disabilities of beneficiaries, and their circumstances, their financial resources, their accomplishments and competencies-to determine how to best accomplish the objectives that reflect the settlor's intent.

The guidance to the trustee can be embodied in a list of positive behaviors that the client wishes to encourage. For example, a trustee may be required to make distributions to assist, encourage and reward the beneficiaries for exhibiting or accomplishing desirable behaviors such as: pursuing an education at least through college; pursuing gainful employment with a view toward being financially self-sufficient; becoming a law-abiding member of society; becoming a productive member of society by making meaningful and positive contributions to family, community and society; engaging in entrepreneurial and/or creative activities; handling money intelligently and avoiding wasteful spending; acting with empathy, thoughtfulness, kindness and consideration toward others; developing healthy and meaningful relationships; and making contributions to charity.