Leaving someone an inheritance is one thing. Making sure they use it wisely is another.
You may worry that a young beneficiary will spend their inheritance too quickly or that a loved one struggling with addiction will use the money in ways that ultimately hurt them. You may also want to spur a beneficiary toward certain goals, such as getting an education or starting a business.
An incentive trust lets you set goalposts that beneficiaries must pass before they can receive certain distributions. Instead of giving someone unrestricted access to their inheritance, you can tie the funds to their actions. Here are a few examples of how an incentive trust can be used:
Fund a college education
Funds in an incentive trust can be used to pay for a beneficiary’s education. For example, a beneficiary might only get distributions while they’re enrolled in college or graduate school. You could even tie distributions to academic performance, such as maintaining a certain minimal grade or staying enrolled a certain number of hours per semester.
Support a business
You may have a beneficiary who dreams of starting their own business. An incentive trust can provide financial support while encouraging them to build a successful enterprise. For example, you could establish a trust that matches a percentage of the business’s earnings or provides additional funding when certain milestones are reached.
Help a loved one through a difficult time
Incentive trusts can also be used to help a loved one struggling with substance abuse or other challenges. For example, a trust may condition certain distributions on participation in a treatment program or meeting specific recovery-related goals.
Is an incentive trust right for your estate plan?
An incentive trust can be a valuable addition to your estate plan, particularly if you want to provide an inheritance while encouraging your beneficiaries to make responsible choices.
However, conditions should be realistic, clearly defined and flexible enough to account for unexpected circumstances. An experienced estate planning attorney can help you explore your options and create a trust that reflects your wishes while protecting your beneficiaries’ interests.