An incentive trust can be very beneficial. You can fund the trust as part of your estate plan. The trustee then distributes payments to the beneficiary in accordance with your wishes.
For instance, maybe you want to ensure that your beneficiary goes to college. To give them an incentive to do so, you state that the trust can only be used to pay for college tuition. The beneficiary can have the remaining balance only if they graduate.
This helps you do two things. First, you can influence the next generation to take steps that you would approve of, like getting an education. Second, you help to dictate how the money is used, so you know that your beneficiary isn’t going to waste it on frivolous purchases or spend it in a way that you wouldn’t approve of.
What are the downsides?
The main downside of an incentive trust is that it can create some animosity. The beneficiary may feel like you are being overly controlling in stipulating how they can use the money even after you’ve passed away. This is especially true if there are other beneficiaries – perhaps that person’s siblings – who received money directly and without the limitations of a trust.
Another potential issue is if the trust isn’t flexible enough to adapt to changing situations. Say that your beneficiary doesn’t want to go to college because they’ve already started a successful business. Without any flexibility, they couldn’t use the money in the incentive trust.
Trusts are just one of the estate planning tools that you can use. Carefully consider the tools at your disposal and how to use them effectively regarding your family’s future.