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Create motivation with an incentive trust

On Behalf of | Aug 17, 2020 | Estate Planning

As part of an estate plan, trusts are often geared around delaying payment of money to heirs who are minors or setting that money aside for a specific use, as is the case with education trusts and special needs trusts. However, you can also use them to motivate your heirs to live a certain way. These are known as incentive trusts.

For instance, you may want to leave a 20-year-old college student a significant inheritance. However, you’re worried that they’re going to leave school and live off of the money or at least take their education less seriously since they know they have that money in waiting. To prevent this, you can set up a trust saying that they only get the money after graduation. If they fail to graduate, they get nothing.

You motivate them to do well in their studies, and you still get to leave the inheritance you wanted. Everyone wins.

There are some potential drawbacks. One is that life is unpredictable. For instance, what if tuition goes up, and they can’t afford it? They have to drop out of school. They wanted to finish, but it’s not possible. Now, they don’t get their inheritance. Wouldn’t you rather give them the option to use whatever amount of money they needed to cover tuition? When a trust is too specific, it can be too limited under changing circumstances.

If you do want to use a trust, make sure you think over it carefully and look into all of your legal options. Trusts can be very useful when you know how to use them properly.