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The pros and cons of incentive trusts

Are you worried that the wealth you intend to pass on to your heirs will cause those heirs to lose their focus and falter on the path to personal success?

It does happen. Fortunately, something called an incentive trust can allow you to use wealth as a motivator and help you guide your heirs to a better future.

What are incentive trusts?

Incentive trusts are trusts that are set up for your heirs -- only they come with a catch. Disbursements from the trust are tied to specific requirements and can be used to reward the beneficiary for reaching certain goals.

For example, you could establish an incentive trust that requires your grandchildren to get a college degree. You could allow disbursements that go toward tuition, room and board, books and other college expenses. Then, the bulk of the money could be disbursed after graduation.

What are the benefits of an incentive trust?

You can use incentive trusts to reward all kinds of positive behaviors while simultaneously denying money to an heir who engages in certain negative actions. For example, conditions on an incentive trust could include:

  • Obtaining a higher education
  • Refraining from illegal drug use
  • Assuming control of the family business

Ultimately, as long as the conditions you put on the trust aren't illegal, whatever goal you want your heirs to meet is up to you.

What are the problems with an incentive trust?

You could be setting your heirs up for failure or hemming them into a path they don't want to be on.

For example, an heir with a learning disability may not be cut out for college. An incentive trust that imposes that condition would be useless and deprive your heir of funds that he or she badly needs.

Requiring your heir to refrain from illegal drug use is a great idea, but it ignores the fact that drug addiction is a disease. The money in the trust could be used for addiction treatment if it wasn't tied to an incentive.

Requiring your heir to take control of the family business sounds fine -- unless your heir's dreams are somewhere else.

Incentive trusts aren't necessarily a bad idea, but they need to be planned very carefully if you want them to be successful. An attorney can offer you more advice on trusts and estates and your specific situation.

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