The pitfalls of incentive trusts

| Jan 12, 2021 | Trusts |

If you are pondering your estate-planning options, one possibility you may be considering is an incentive trust. These trusts work to motivate your beneficiaries to strive toward certain pre-set goals as conditions for receiving disbursements from the trust.

Let’s examine incentive trusts and the pros and cons of funding one in greater detail.

When it could be a good move

Do you have young children who might benefit from some positive motivation if you pass early in their lives? The death of a parent is a harsh blow to absorb. Some kids get off-track and never quite find their way back. An incentive trust that motivates them to graduate high school, enroll in and finish college and remain gainfully employed can provide the gentle nudge they need to do the next right thing.

When it’s not such a great idea

Incentive trusts are often accused of being a “dead-hand control” over a person’s life. If your beneficiaries are adults, expecting them to jump through hoops in order to get money from the trust can be humiliating. 

For instance, suppose the terms of the trust say that your beneficiary must be gainfully employed to receive funds. But the beneficiary gets diagnosed with ALS and can no longer work or gets disabled in a car accident. Should they then have to spend money challenging the terms of the trust in court?

A stay-at-home parent could also be ill-served by an incentive trust that penalizes them for staying home to care for their children or grandchildren. Would their time be better spent nine-to-fiving at the local Wal-Mart just to retain access to the trust’s funds?

Review all your options with an estate-planning professional

There are all sorts of options for passing your wealth on to future generations. Your estate-planning attorney can review each possibility with you and combine options to achieve a workable solution for everyone.