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Why would you use an incentive trust?

| Dec 18, 2020 | Estate Planning |

A trust can be used for numerous things. The trust itself is just a way to set money for an heir and to be distributed in accordance with the instructions. One of the most common examples is an educational trust, which often puts money aside for college tuition, but a lesser-known and often useful trust is an incentive trust.

What is the incentive connected to?

The first thing you need to decide is what you want to give your heir incentive to do. You can then connect the trust to this behavior – with some exceptions — and essentially show your heir that they get their inheritance if they follow those rules.

For example, some wealthy parents know that their children wouldn’t have to work after getting an inheritance, but they don’t want to ruin the children’s sense of motivation. An incentive trust may set up equal payments for 10 years, rather than a lump sum, and say that the children only get each year’s payment if they’ve been employed all year.

You can also incentivize someone away from negative behavior. An heir who has repeated run-ins with the law, for example, may be told that they can only access the money in the trust if they’re not arrested or caught breaking the law. As a parent, you may use this to refine their behavior and ensure that it continues that way after you pass away.

Setting it up

Again, trusts are flexible. This is just one example of how to use them. If you’d like to set one up, you need to do it in accordance with state laws. An experienced estate planning attorney can help you.