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What are incentive trusts, and should you use one?

On Behalf of | Feb 16, 2024 | Estate Planning

Many people choose to include a trust in their estate plan. There are several types of trusts, although one of the most controversial is the incentive trust.

These estate planning resources are drafted in a way that aims to incentivize a beneficiary to act in a certain way. For example:

  • To complete their education
  • To pursue a particular line of work
  • To end a particular relationship
  • To quit a bad habit

While those intentions are usually (but not always) well-meant, it’s clear they could cause problems. Consider the following hypotheticals.

They can hamper individuality and freedom of choice

Let’s say you are a doctor, as was your father, grandfather and great-grandfather. Your son, however, dreams of working in conservation. You tell him he is being stupid as there is no money in that, and he should get on with pursuing the family profession or he won’t have access to his trust fund any more. Maybe your child will come to thank you for using the bait of an inheritance to push them to qualify as a doctor. However, it may be that he’ll simply resent you for it for the rest of his life for conditioning his trust in this way.

They can prevent money from being used for something you would approve of

Your child refuses to go to medical school and forfeits their inheritance. You never live to see them forge a successful career working with wildlife where they are happy and well-respected but poor. You don’t live to see your granddaughter born and then die because your son could not afford the life-saving treatment she needed. A treatment that he could have paid for if only you had not conditioned his inheritance on going to medical school.

If you are considering using an incentive trust, be sure to get legal guidance to examine all scenarios and perhaps consider ways to allow some flexibility into your estate planning approach while serving your goals in the process.