We all have goals for ourselves, and we all are familiar with laying out plans to accomplish those goals, mental checklists of steps we have taken or need to take in order to get where we want to be. But what about the goals we have for our children or other family members? Their success is important to us also, but it can be daunting to think about what happens to those goals and dreams after we’re gone. If you’re facing this situation, you may want to consider an incentive trust.

 

Definition and example

An incentive trust is like a traditional trust in that it delays the distribution of inherited funds or property until the trustee reaches a certain age, but it also adds additional conditions – goals that the trustee will need to prove they’ve met before they can access the inheritance. For example, you may know that your son wants to become a chef, but he’s also in danger of relapsing into past bad behaviors instead of pursuing his dream. You could establish an incentive trust to have distributions conditional on his enrollment in culinary school, graduation/certification from said institution, all the way up to getting hired as a chef or advancing his career.

 

Weigh your options

Incentive trusts, just like other investments and financial products, have advantages and disadvantages to consider:

 

Advantages:

  • An incentive trust can encourage your heirs to act in ways you think are best
  • The trust can help your family member achieve their goals
  • It can also help you complete tasks you left behind, such as continuing your business or donating to charities

 

Disadvantages:

  • If your goals do not align with those of the trustee or beneficiary, it can cause resentment
  • Asking your heirs to carry on with your goals could cause them to neglect opportunities that come later but would ultimately be better for them
  • Incentive trusts ask more of their beneficiaries but also of the trustee, and can therefore be more expensive to establish or maintain

 

Getting it started

Once you’ve decided that an incentive trust should be set up for one or more beneficiaries, there are a few things to keep in mind, including but certainly not limited to:

 

  • Duration – If your wealth is substantial, it may be enough to last your family multiple generations. Be careful with this, though, as it becomes harder and harder to avoid prohibitive costs and other disadvantages as the trust ages
  • Careful selection of beneficiaries is important; you may want to support your child but not their spouse that you haven’t yet met.
  • Trustee designation – You want to select a trustee whose goals align with yours, and who you believe will make similar decisions to yours as to when conditions have been met or what to do when circumstances change

 

Get the information you need

If you’ve got deeper questions about incentive trusts or would like to consult with a professional, drop us a line or give us a call – we look forward to serving you.