Establishing the perfect FIT So what's the best way to handle this tool? Tom Orecchio, of Greenbaum and Orecchio in Old Tappan, NJ, warns that poorly designed FITs tend to do one of two things: They send the wrong message by overemphasizing money instead of rewarding a beneficiary's achievement; or they allow grantors to impose their own set of beliefs on their beneficiaries. To avoid these pitfalls, Orecchio advises grantors to look at each beneficiary individually, take into account his or her personal needs, interests, beliefs, and lifestyle, and then tailor incentives that fit the specific beneficiary's goals.

Orecchio recalls a case in which a client had two children: One had some interest in joining the family business and the other wanted to go into the performing arts. He set up a FIT that used "family business" incentives for his first child; for the second child, he used provisions that included studying acting at a school like Juilliard or Northwestern University, practicing the craft in summer stock theaters, and establishing a career as a "working actor."

"The use of subjective standards can be a trap for your designated trustee, though," warns James Strull. This becomes particularly problematic, he says, when a trust includes incentives to avoid drugs or gambling. Designing a relatively objective standard can be very difficult with these kinds of behaviors, yet leaving the issue entirely up to the trustee's discretion can subject the trustee to attacks by the beneficiaries.

"Setting up rigid earnings targets that an incentive trust will match may do a disservice to a child who grows up to become a teacher or a minister, for example, or someone who suffers a disabling injury," notes Strull. "All of these people are productive members of their community, but may not reach the earnings threshold."

Voicing similar concerns, David Sebastian, of The Physicians Wealth Management Group in Parsippany, NJ, advises grantors to attach a letter to the trust agreement giving the trustee the power to make additional trust disbursements at his or her discretion. At the same time, Sebastian also advises picking a trustee who understands the grantor's intentions well. (For more on choosing a trustee, see "Who should handle your estate?" in our Nov. 8, 2002 issue and Personal Finance: Family.

Is a family incentive trust worth the effort? Before running out to your estate planner to set up your own family incentive trust, ask yourself the following questions:

What do I hope to accomplish? "I ask clients who want to allocate distributions based on ridiculous clauses, 'Is this really what you want?'" says J.A. Abels of Family Estate Planning in Papillion, NE. David Sebastian agrees, adding, "When you're all through, it may work out to where you're totally cutting out an heir—and is that what you intended to do?"

How much will the trust be worth? Although you can establish a FIT with a minimal amount of assets, remember that you will first need to cover the cost of legal fees needed to establish the trust and later the costs of administering it. Depending on the complexity of the provisions you include, the initial cost of writing a trust document can range from $2,000 to more than $20,000. Annual administration fees depend on the size of the trust, with some trustees charging a percentage of the income generated and others charging a smaller percentage of the trust's total assets. In addition, you'll need to consider how much money would serve as an incentive for each of the individual beneficiaries. With these considerations in mind, none of the estate-planning experts we interviewed mentioned an amount in trust of less than $250,000.