Property, money and family heirlooms aren’t the only things that people want to pass down to their beneficiaries and heirs. They often aim to instill certain values or work ethics, as well – usually in hopes that they’ll create a lasting legacy of familial success.
Incentive trusts are a good way to do that. An incentive trust is a type of irrevocable trust that is designed to motivate or guide a beneficiary by setting out conditions that have to be met before that beneficiary receives any distributions – rather than distributing the money at predetermined intervals or when the beneficiary reaches certain ages.
How do incentive trusts work?
Essentially, incentive trusts direct the trustee to disburse money according to whatever guidelines the grantor selects. They are often used to make certain that the next generation doesn’t squander the family wealth through poor choices.
For example, an incentive trust can be designed so that a beneficiary with a drug problem would have to pass a drug test to make sure that they aren’t using again before the trustee will release any funds. Or, an incentive trust could be set up so that it covers all of a beneficiary’s financial needs and living expenses so long as they’re in college. As long as the provisions aren’t illegal or against public policy (like something that promotes divorce), testators are largely free to set whatever terms they like.
However, it’s wise for testators to be cautious when exerting such “dead hand” controls over their estates. Too many restrictions can tie a trustee’s hands when unexpected situations arise. For example, a grandparent may set up an incentive trust to pay for their grandchild’s college and get them started in their field – but a car wreck could leave that grandchild permanently disabled. If there’s no flexibility in the incentive trust, the money that was set aside for their education may sit there indefinitely while it could be put to good use for their care and comfort.
There’s nothing wrong with wanting to protect your legacy and your beneficiaries through carefully planned incentive trusts. However, you want to make sure that your true intentions are preserved. Seeking legal guidance can help you make certain that the terms you lay down for your beneficiaries make sense in that context.