There are many different ways to use a trust as you make your estate plan. One example is to create a trust that incentivizes your beneficiaries to live in a certain way or accomplish specific goals.
For example, some parents are worried that their children will live off of the inheritance and stop working. An incentive trust could be connected to their employment, giving them annual distributions that are equal to their take-home pay from work. This incentivizes them to work hard, as increasing their own earnings also increases the distributions from the trust.
Additionally, the trust could be set up to reward them for meeting specific goals. Say that you want one of your younger beneficiaries to get a college education. You may leave them a substantial trust, with the instructions that they cannot make withdrawals from it until they graduate. This gives them an incentive to finish their education, rather than dropping out after they receive the money.
Can this be problematic?
Incentive trusts can cause some problems. The beneficiary may not believe that it’s fair. They may think that it’s too strict, or that it’s not flexible enough to reflect the realities of their life. They may feel like you are still trying to control them.
For instance, say that you created an incentive trust saying the beneficiary has to graduate from college. But that beneficiary decides to join the military or start a business instead. Should they get the contents of the trust even though they didn’t meet that goal?
As you can see, trusts can be very beneficial, but it’s important to consider the potential medications and how to set one up so that it works for your family.