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Why you should think twice about incentive trusts

| Jul 9, 2021 | Estate Planning |

You love your family , and you’ve done everything you can to provide them with the good things in life. Now that your children (or grandchildren) are approaching adulthood, however, you’re worried that maybe they’ve had things a little too easy.

Could the wealth that they stand to inherit from you make them unproductive and entitled? Your concerns are the same as those that wealthy parents have had before — which is why incentive trusts were born.

What is an incentive trust?

Incentive trusts are a type of conditional inheritance. Your heirs only get the money or other assets you’ve set aside for them if they meet specific conditions.

For example, maybe you want all of your children to pursue higher education. You can set up an incentive trust for each of them that will pay for their schooling, housing and other educational needs all through their education — but nothing else. Plus, they can’t touch the bulk of the money in the trust until they’ve achieved an undergraduate degree or better.

What are the problems with incentive trusts?

Incentive trusts can be too rigid, and that can end up defeating their true purpose. For example, maybe your educational goals for your children are there just because you want to make sure they always have something to fall back on as a career.

What happens, however, if one of your children wants to go to trade school to be a plumber or a welder? That would accomplish the same goal, but they wouldn’t meet the terms of your trust — so they’d be financially cut off from their dreams.

Similarly, what happens if one of your children ends up in a horrible car accident that derails their education entirely? Do you really want to put the money you’ve set aside for a child in that condition forever out of reach?

Finally, even the trustee you choose could be problematic — especially if they are the sole judge of whether or not an heir has met their obligations under the trust. Any gray areas in the language of the trust could be used to keep the assets out of your heirs’ hands.

Incentive trusts aren’t all bad, but they should be used with caution. Learning more about the different kinds of trusts you can create may help you find a useful, flexible solution to your estate issues.