What You Should Know About Incentive Trusts

 Posted on November 07, 2019 in Estate Planning

Wouldn’t it be nice if every individual was fiscally responsible and able to make good decisions about money? Of course it would be, but, sadly, that is the world we live in. In reality, countless people have a tough time with their finances and establishing healthy spending habits. For people like this, money tends to burn a hole in their pocket, so to speak, and is often spent in frivolous ways—at least according to their family members and friends.

This issue is frequently relevant in the realm of estate planning, as those who are creating an estate plan may have concerns about leaving a large inheritance to a child, grandchild, or another heir who has shown to be bad with money. They worry that the assets that they have worked hard to accumulate will be gone quickly, but they fear that potential family in-fighting that could result from cutting the would-be heir out of the estate plan entirely. If you are facing such a dilemma, you might consider using an incentive trust.

What Is an Incentive Trust?

By definition, an incentive trust is a trust arrangement through which you—the creator—can set conditions on how the assets of the trust will be distributed. Your conditions could be set to reward “good” behavior or to discourage behavior that you feel to be destructive or negative. For example, you could set up an incentive trust so that the trust’s assets will only be distributed to your named beneficiary after he or she graduates from high school and starts college. You could even increase the disbursement from the trust when the beneficiary completes his or her degree program.

On the other hand, you could set up a trust to end disbursement payments in the event the beneficiary is convicted of a crime. You could even set conditions that require the beneficiary to pass tests for illegal drug use to continue receiving disbursements. Your incentive trust could include any incentives or conditions that you wish, as long they do not violate any laws.

Advantages and Disadvantages

The most obvious advantage to an incentive trust is that it provides for a substantial measure of control of your asset, even after you die. Incentive trusts could inspire your beneficiaries to develop a healthy work ethic that prepares them for the road ahead. They can also help keep your heirs from simply relying on your money for a comfortable life with very little of their own effort.

On the downside, it is not uncommon for a person to use an incentive trust to push a child or grandchild into a leadership role in a family-owned business. They could also use such trusts to set conditions that are unreasonable for their beneficiaries, such as requiring a daughter to get married and have a child before receiving any assets from the trust. Such concerns should be taken under consideration when drafting an incentive trust to avoid the potential for long-term family resentment.

A DuPage County Trusts Attorney Can Help

For more information about incentive trusts and how they could help you and your family, contact an experienced Lombard estate planning lawyer. Call 630-426-0196 for a confidential consultation with the skilled team at A. Traub & Associates today. We can assist you in customizing an incentive trust to meet your needs and those of your beneficiaries.

Sources:

https://www.wealthmanagement.com/estate-planning/ultimate-dead-hand-control-incentive-trusts-part-i

https://www.investopedia.com/articles/pf/08/trust-basics.asp