What is an incentive trust?

An incentive trust is meant to encourage or discourage the behavior of a beneficiary. For example, in the case of a rebellious child, a parent may use an incentive trust to encourage them to enter college by setting aside tuition. Incentive trusts take the guess work out of inheritances. Instead of leaving your wealth in one lump sum to a child, you place certain restrictions such as age, employment, education, or other forms of proof of maturity.

Advantages of an Incentive Trust

Incentive trusts effectively limit and motivate the beneficiary to mature and live a responsible life in order to gain access to their inheritance. For those trusts that are simply meant to provide for a minor, the restrictions can be as simple as specifying that the trust is intended for health, welfare, and education as well as a final age for release of all funds. Some parents want to reward their children for excellence in school by giving out a certain amount from the trust after a successful school semester. Incentive trusts have even been utilized to protect a family business by offering an added inheritance to whomever continues caring for the business.

Disadvantages of an Incentive Trust

If the restrictions on the trust are too hindering or too numerous, the trust could become unrealistic, causing resentment and further rebellion. Additionally, many would argue that an incentive trust controls children from the grave and is a final attempt at values that should have been instilled during the life of the trustor. If an incentive trust is worded improperly, it could overlook the child’s actual needs such as their overall health and medical needs. Finally, in the case of family business incentive trusts, the trust may hinder that child’s ability to further their own career in some other area that you as a parent overlooked.

Making an Effective Incentive Trust

If an incentive trust sounds like a good option for your estate planning needs, think very carefully about the requirements placed into the documents. The ideal requirements should be very broad and outline overall desires or expectations. For instance, instead of stating that the child must graduate from an accredited university, state that the child will receive a lump distribution upon either graduating college or obtaining employment.

If age restrictions are used, such as requiring that the child reach age 25 for the first lump distribution, also place an emergency and special needs safety net into the trust. Use phrasing such as, “this trust is intended for health, education, and welfare of my child.”

Avoid requirements that dictate a career for your child, such as requiring that your child run your business when you die. Remember that many times your child may not ever be qualified enough to effectively run your business simply because they are gifted differently. Additionally, never punish a child for wanting to become a stay-at-home parent. Remember that by making this sacrifice they are instilling values into your grandchildren.

Case Studies: Understanding Incentive Trusts

Case Study 1: Encouraging Education

Sarah, a wealthy parent, wanted to encourage her children to pursue higher education. She set up an incentive trust that would release a substantial portion of their inheritance upon successful completion of a college degree. This trust motivated her children to focus on their studies and provided them with a strong incentive to graduate.

As a result, both children pursued higher education and successfully earned their degrees, benefiting from the trust’s provisions.

Case Study 2: Protecting the Family Business

James, a business owner, was concerned about the future of his family business after his passing. To ensure its continuity, he established an incentive trust that would grant an additional inheritance to the child who took over the management of the business. This trust provided an extra incentive for his children to consider joining the family business and allowed James to pass down his legacy.

Case Study 3: Promoting Responsible Spending

Emily, a cautious parent, worried about her child’s ability to manage a substantial inheritance responsibly. She created an incentive trust with gradual releases of funds tied to specific milestones, such as reaching certain ages or achieving financial goals. This trust encouraged her child to demonstrate financial maturity before gaining access to the full inheritance, promoting responsible spending habits.

Getting Legal Help

Finally, always know your trustee. Choose someone who you know is financially responsible and will handle the trust in a motivational way as opposed to using the funds as bribes. Furthermore, always have your incentive trust drafted by an estate planning attorney to make absolutely certain that your intent is completely and clearly conveyed.