An incentive trust is any trust that rewards beneficiaries with distributions for desired behavior. They are popular for people who fear that their heirs will waste a large inheritance. Below are some tips if you are considering setting up an incentive trust.

Incentive trusts sound like a great idea to many people. We want our heirs to do good things with their lives and not receive a large inheritance only to blow the money on wasteful things.

For example, if you are creating a trust for a minor child, you might want to create a trust that rewards the child for graduating from college or getting a job.

Not all incentive trusts are created equally, however, and it is important to set one up properly or it is likely to fail.

Recently the Wills, Trusts & Estates Prof Blog published some tips in an article titled “Use An Incentive Trust to Make Sure Beneficiaries Stay On The Up And Up.”

The tips include:

• Decide whether you want to create specific things for beneficiaries to perform to receive distributions or if you want to leave everything up to the discretion of the trustee.
• Determine whether payments should be made directly to the beneficiary or to a third party. For example, if the trust is to provide money for school, should the trustee distribute that money to the school in the form of tuition or give it to the beneficiary to pay the school?
• Decide how long the trust should exist. You can keep the trust in place for the beneficiary’s entire life or you can set the trust to terminate at a certain point.
• Decide what will happen to the trust assets if the beneficiary does not live up to expectations.
• Make sure that all key conditions are spelled out in the trust.

It is important to note that some courts will not enforce incentive trusts that require actions that are against public policy, such as requiring a person to marry a person of a certain race or religion.

Make sure to consult with an attorney about what types of conditions you can make.

For more information about estate planning, please visit my estate planning website.

Reference: Wills, Trusts & Estates Prof Blog (July 27, 2015) “Use An Incentive Trust to Make Sure Beneficiaries Stay On The Up And Up.”