What is an incentive trust, and do I need one?

On Behalf of | Jul 1, 2018 | Trusts

Are you putting off your estate-planning efforts in the hope that one of your beneficiaries will develop some financial restraint or learn how to manage his or her fiscal affairs? There is a possible solution that will allow you to quit delaying your estate planning and start the ball rolling.

It’s tough to watch family members lead dissolute lives and squander their money. But when the source of that money is your own hard-earned dollars, it’s even harder to accept.

You may be able to nudge your beneficiaries further along the financial road you’d like them to tread by setting up an incentive trust. This estate-planning tool can be structured so that your beneficiaries must fulfill certain conditions in order to receive disbursements.

Here’s how it might work.

Many incentive trusts are designed to pay beneficiaries when they have attained or achieved some milestones of life. One example might be to release funds to children or grandchildren only upon their graduations from college. They may then get another disbursement after finishing law school or getting an MBA.

Another milestone linked to a disbursement might be a marriage or the birth of children. Some incentive trusts have age-specific disbursements, e.g., get $25,000 at age 25, $30,000 at age 30, etc. With these type of structures, it is hoped that with age comes maturity and the ability to manage one’s finances.

What if your adult children don’t pursue high-paying careers but wind up teaching or doing social work in underserved communities? Trusts can be structured to reward those for their meaningful efforts by supplementing low salaries.

If your beneficiary can’t seem to keep a job or is in the throes of a powerful addiction, you may want to include a clause stating that money will be paid only if the beneficiary remains employed and sober. You could also set it up to where the funds are funneled straight to a rehab facility if they need help getting sober.

There are also negatives associated with incentive trusts. Suppose that you designed the trust to pay benefits only when your son remains employed. On his morning commute, he’s hit by a bus and remains permanently disabled and unable to work. Under the trust’s terms, through no fault of his own, he would no longer have access to the funds he desperately needs.