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What is an incentive trust?

All parents worry about their children and ultimately want a son or daughter to succeed. When possible, most parents also want to be able to pass on wealth to a child via an estate plan. In cases where a parent has concerns about a child's career or life choices and/or wants to encourage a child to make certain choices, it makes sense to explore establishing an incentive trust.

Like any trust, the creator of an incentive trust funds the trust and names a beneficiary along with a trustee to manage and distribute the trust's assets. While most trusts contain provisions that provide a trustee with direction on how to manage and distribute a trust’s assets, an incentive trust requires that a beneficiary fulfill certain conditions.

Incentive trusts are readily used by parents to either encourage or discourage certain actions and behaviors. From graduating college and working for a nonprofit to attending drug treatment and staying clean; a trust's distributions are only paid out if a beneficiary abides by its conditional terms.

While incentive trusts can be effective in providing a beneficiary with sometimes much-needed motivation, there are also be drawbacks. For example, what happens if a child never fulfills the terms of a trust's conditions? Would a parent really want a son or daughter to struggle financially and perhaps even become destitute? Due to the numerous and varied situations that may arise with these types of trusts, parents are advised to provide a trustee with a certain amount of lead way and power to make appropriate decisions.

Source: Barron's, "Incentive Trusts Can Keep Your Heirs Motivated," Amy Feldman, May 17, 2015

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