An incentive trust is a type of trust that can hold assets and only release them to an heir if they meet certain stipulations. The goal is to incentivize that heir to act in some specific way.
For example, parents are sometimes worried that adult children will quit their jobs or fall into destructive lifestyles, such as drug abuse, once they get an inheritance. An incentive trust could say that the person only gets an annual payout if they avoid legal charges, if they maintain gainful employment or if they do other things that the parent considers to be beneficial – like getting a college education.
You can see how there are a lot of potential upsides for an incentive trust, but are there any downsides to consider?
It can create resentment
One thing to remember is that children sometimes resent incentive trusts. They do not want to feel like their parents are still trying to control them and the way they spend their money. This is especially common when parents and children perhaps do not have a good relationship prior to the parents’ passing.
It may be unrealistic
Another thing to remember is that the incentive trust may not realistically fit with the child’s lifestyle. For example, maybe it says that the child can’t receive their inheritance until they graduate from college. But what if the child wants to join the military? What if they want to start their own business or play professional sports? There are many career paths that do not require education but could still prevent this person from getting their inheritance.
Trusts can be very useful, but it’s important to set them up properly for your family. Take the time to look into all the necessary legal steps to set your estate up the way that you feel is best.