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Consider an incentive trust for your heirs

You probably don't want to control every aspect of your heir's future -- but, at the same time, you may have some strong feelings about just handing someone a tremendous amount of wealth with no strings attached.

That's where an incentive trust can be valuable. Essentially, an incentive trust ties disbursements of money to a set of expectations. When the beneficiary meets those expectations, the trustee can make additional disbursements. Sometimes there's a base disbursement and additional money is offered as an incentive. Other times, the entire trust is held as an incentive.

For example, maybe you're a fierce opponent of the vices of smoking and gambling because they affected your son negatively and you don't want to see your grandson go down the same road. You could, therefore, create an incentive trust with your grandson in mind that will pay for your his college education all the way through graduate school, as long as he abstains from smoking and gambling.

Other incentive trusts are tied to a beneficiary's earnings because the grantor is worried that having too much money just handed to the beneficiary too early will kill their incentive to do something worthwhile -- or cause them not to appreciate the value of what they have been left. For example, you could set an incentive trust so that it disburses an amount equal to your heir's earnings each year.

There are some important things you have to think about before you set up this kind of trust. For example:

  • What is the heir stays home to raise their children?
  • What if your heir becomes disabled?
  • What if your heir does unpaid volunteer work?

These are just some of the issues that may need to be addressed in an incentive trust so that the restrictions on it don't defeat your intentions. For more information about incentive trusts or estate planning in general, contact our office.

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