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Incentive trusts: Pros and cons

You plan to leave significant wealth to your heirs, and you want a say in how they use it and how they live after they get it.

After all, you did not work your entire life to save money for them, only to see them waste it on early retirements and frivolous purchases. You don't want the money to spoil them and kill any motivation they have. As a parent, you have far bigger plans for your children than that, but you are afraid they will not follow through without you around to make sure they do.

An incentive trust

One want to control the money is to use an incentive trust. The incentives, as long as they're legal, are up to you.

Want your children to graduate from college? The trust can pay a portion of the inheritance after graduation. Want them to have lucrative careers? Rather than handing them money, the trust could simply match their annual earnings. This way, they still have incentive to work. Want to promote the arts and allow them to follow their passions? The trust could pay out only if they meet certain quotas with paintings, songs, poems, novels and whatever other type of art they enjoy.

Will it work? Below are a few pros and cons to consider.

Pros

For one thing, these trusts are flexible. You can address whatever you value, from moral behavior to education to career goals.

You can also add in age restrictions. Perhaps your main concern is an immature heir wasting the money immediately. Along with other incentives, you could make it so payments don't start until age 25 or 30 or whatever age you deem appropriate.

You can also try to head off bad habits and unhealthy lifestyles. For instance, you may include a clause cutting off payments if an heir can't pass a drug test. Your heirs all face unique challenges. You can create the trust specifically for each person's needs.

Cons

The trust can create some resentment. Your heirs will likely feel that they should be allowed to do whatever they want with the money and they won't like that you're controlling it even after your own passing.

Trusts also may not take into account all possible situations. For instance, if the education clause says a child gets nothing before college graduation, what happens if that child is in a car accident and receives a brain injury? This is when the child needs the money the most. Will he or she remain cut off without that degree?

It's also possible to set unrealistic goals. Perhaps you went to an Ivy League school. You don't want a community college degree to trigger the trust, so you set it up so the kids only get paid for graduating from Ivy League institutions. While that's a great goal, the reality is that these schools have tough standards and not everyone makes it.

Creating your trust

As you can see, there is a lot to consider with incentive trusts. Make sure you really think over all of your legal options before you begin.

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