An incentive trust is, in many ways, quite a simple idea. You want to give your heirs an incentive to live a certain way, so you put their inheritance in a trust and they only get it if they follow the rules you set. For most parents and grandparents, they just want the heirs to have a productive life with gainful employment, rather than living off of the money. The incentive, then, can be that they only get the money if they’re employed or that the trust pays out the same amount that they earn every year, giving them incentive to work harder and move forward in their career.
While that sounds good, you do have to realize that there are potential exceptions. Here are a few key questions to ask:
- What if the heir suffers an injury or contracts an illness and becomes disabled and unable to work?
- What if the heir does not have a job because they are in college?
- What if the heir can’t get a job because of economic reasons outside of their control, like a major recession?
- What if an elderly family member needs care and the heir decides not to work in order to provide it?
- What if the heir starts a family and opts to stay home and raise the kids?
- What if the heir wants to work with a charity or take a volunteer position to help others?
As you can imagine, most parents would still want the heir to get their inheritance in these situations. When drafting an incentive trust, consider all possible outcomes and make sure you know exactly what options you have.